...What we need is some capital in the financial system to support the massive de-leveraging that is under way. As the Journal points out in this excellent piece from this morning, rate cuts are leading to declining dollar value, which is leading to less confidence from investors to inject capital into the U.S. which is making the economy less stable:
"The problem is that dollar weakness is making both of these problems worse. The flight from the dollar has made U.S.-based investments less attractive, at a time when the U.S. financial system urgently needs to raise capital. And the commodity boom is translating into higher food and energy prices that are robbing American consumers of discretionary income. In the name of avoiding a recession, reckless monetary policy has made one more likely."
Since we know monetary policy is like sex - exhillarating when you first do it, but it takes 9 months to see the full results - and since the Fed first started lowering the discount rate in the fall, perhaps enough is enough. Afterall, much of this problem started with Uncle Alan's Liquidity Party back at the turn of the century, and it is unclear to me that we need a repeat of that fiasco.
So far the broader economy seems to be holding its own without completely tanking and we have both fiscal and monetary stimulus underway so this might be a decent moment to take a breath and say "Steady as she goes".
Come for the economics, stay for the sex jokes and rockin' tunes!