So Bernanke decided tohug the hedgies after all ...By cutting the federal funds rate by a 1/2 percent, Bernanke has rewarded the banking system for its latest panic. Think of it like this: money is banking's most important raw material, and the Fed, the sort of OPEC of the world money supply, has just reduced the price of that raw material by over 10%.
Think of this behaviour in any other industry. As an oil firm, for example, I drill oil wells in distant expensive locations hoping it will be profitable. It tuns out not to be. So OPEC decides to cut me some cheap oil to compensate me. What sort of incentive does that give me?
The World Business Review has a wonderful conversation between three academic central bankers: Professor Alan Blinder, Professor Willem Buiter and Professor Avinash Persaud. Informed, high-quality, and with deep disagreement. Buiter gets my vote.
As he says, over the last 10 years, ``the Fed have solved one credit boom by creating the next one''. Here we go for the next one.
