Jan. 22nd, 2008

elvum: (Default)
So, it seems to be universally agreed that the 0.75% base rate cut announced today by the US Federal Reserve Bank was an attempt to stop global stock markets from continuing their recent sharp downward trend. It also seems to be agreed that the size of the cut is unusually large, and unusually timed, in that it didn't follow a regular meeting of their "Open Market Committee". My rudimentary understanding of economics leads me to believe that by making it less attractive to invest your money with the US government, investors will preferentially buy shares, increasing demand and hence prices.

So far, so good. But I found this article interesting. It seems to be agreed by those quoted in the article that cutting the base rate by 0.75% is very significant. There also seems to be agreement that the action is "risky". But what I don't understand is people asserting that the decision is evidence of "panic". Do those commentators actually believe that the committee made their decision in the throes of gut-wrenching terror? That the decision was not the result of rational decision-making nor of reasoned argument? Do they have inside information on the mental states of the committee members? If they don't have any evidence for their assertions, aren't they acting irresponsibly by baselessly contributing to the fall in investor confidence?

I think I have previously analogised bankers and traders to a troupe of monkeys encountering fire for the first time, egging each other closer and closer until one of them gets burned, whereupon they all run away screaming. This kind of negative commentary strikes me as being the equivalent of shouting "fire!" at the first imagined whiff of smoke - dangerous; unhelpful; irresponsible.

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