Tuesday, September 16, 2008

The Fed does the right thing by not easing

Congratulations, Ben, you've shown some courage under fire. Yes, the financial situation is distressing and the economy is weak, but inflation is clearly a problem and the dollar needs help. You've got your eye on all these problems. Relative to what the markets were expecting, you gave more weight to inflation and the dollar than to the economy. This is a real break from your past behavior and one that I think is very encouraging.

The Fed can (and did this morning) inject funds into the banking system at any time to relieve liquidity shortages. They don't need to make money cheaper in order to do this.

The market may be disappointed by this lack of Fed action, but this could be one of those many times when the market's knee jerk reaction is the wrong one from a long-term perspective. I bet the market will come back to its senses and eventually applaud this (lack of) move.

1 comment:

CDLIC said...

A few quotes regarding banking from a champion of free enterpirse:

Imprudent granting of credit is bound to prove just as ruinous to a bank as to any other merchant. Ludwig von Mises

There was no reason whatever to abandon the principle of free enterprise in the field of banking. Ludwig von Mises

It is extremely difficult for our contemporaries to conceive of the conditions of free banking because they take government interference with banking for granted and as necessary. Ludwig von Mises

What is needed to prevent any further credit expansion is to place the banking business under the general rules of commercial and civil laws compelling every individual and firm to fulfill all obligations in full compliance with the terms of the contract. Ludwig von Mises