I’m sure you saw last Thursday’s WSJ piece by Wayne Angelle. Great stuff. Wayne makes the case as he did on Kudlow & Co. last week, that the Fed was too loose in 2003, and then too tight in 2006. This is the classical central bank historical pattern - overshooting. Too loose - inflation. Then too tight - deflation. Then repeat. It happens even when the Fed uses a price rule (as opposed to the disastrous fine-tuning the economy approach) because they almost always do it by looking backward. That’s like trying to drive by looking through the rear-view mirror.
Anyone who watched Kudlow & Co last week already knew the stuff in Wayne’s article, which is an interesting point in and of itself. The Wall Street Journal used to be the intellectual center of Reaganomics, now it’s shifted to weeknights at 5 pm on CNBC. The credit crunch was worked out in real time there last Wednesday. Larry said that the Fed needs to reassert it’s historic role as ‘the lender of last resort’, and Wayne Angelle said that a cut in the discount rate is the right tool to do it. Within 72 hours - viola
- the rate was dropped and the markets stabilized.
Now we’ll see if the Fed is willing to keep at it and essentially acknowledge what has already happened - a cut in the Fed Funds rate. The Fed has asserted it’s lender of last resort function (with Friday’s discount window action); it’s time for them to reassert their role as a provider of currency to the nation. The disinflationary signs have moved from housing to credit markets, how far do they have to go before the Fed takes its eye off the rear-view mirror and places them on the road ahead?
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