Wednesday, April 30, 2008

How Europe avoided our mess

THE FEDERAL RESERVE is expected to decide today whether to cut interest rates yet again. But the Fed is about out of tricks, and leaks suggest that the rate cut will be small and the last one for some time.

Though the Fed has cut short-term rates from 5.25 percent last September to the current 2.25 percent, credit costs to long-term borrowers are higher than they were a year ago - because lenders fear increased inflation. Some of this is the Fed's own doing. Its cheap-money policy has weakened the dollar, raising prices of imported commodities.

Many credit markets are still frozen for lack of investor confidence - something that low interest rates cannot bring back. Losses continue to mount to the balance sheets of banks that made foolish speculative investments, causing credit to contract further.

None of this had to happen. The credit crisis, which is sapping America's economic strength, was the result of an almost religious belief in deregulation whose excesses are now coming home to roost.

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