Friday, March 14, 2008

A Recession is Necessary?

Several economists, including one member of the Fed's policy-making committee, have argued that more rate cuts are the wrong solution to spur economic growth. Some even believe a recession might be the best answer for the economy in the long term. That's still a minority view though.

Federal funds futures on the Chicago Board of Trade show investors betting that there is a 100% chance of at least another half-point cut at the March 18 meeting, and an 88% chance of a three-quarter point cut...

"The problems the markets are facing are not due to interest rates being too high. It's a lack of confidence," said Barry Ritholtz, the CEO and director of equity research for Fusion IQ.

Ritholtz and others arguing against more cuts say that only an economic slowdown can limit the inflationary pressures now building. They say that rate cuts are causing a sharp decline in the dollar that is feeding record prices for commodities such as oil and gold.

"The bottom line is that additional rate cuts are not going to help lenders trust each other and lend more," said Rich Yamarone, director of economic research at Argus Research. "They are just going to throw accelerant on a heated inflationary environment."...

"What is this obsessive need to overturn the business cycle?" said Ritholtz. "You can end up preventing the market from following its normal course of clearing out the deadwood and letting healthy trees grow. The creative destruction of capitalism, that's what the Fed is working to prevent."

read the CNN story

Recessions are corrective measures.

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