Sunday, December 23, 2007

How to Avoid Recession? Let the Fed Work - New York Times

I agree with Mankiw here that the economy should be handled with a very light touch from a policy level, especially considering how unpredictable markets currently are and how potentially fragile the entire financial system may be. (Still almost 200 basis points between LIBOR and 3 month Treasuries).

I would actually go further than Mankiw and suggest that even the Fed should stay out of the way and not mess further with interest rates.

Here are my concerns:

1) Inflation: I understand the need to boost the availability of capital, but cuts in interest rates will have a continued eroding effect on the dollar and as we import so much stuff, the price of that stuff is bound to go up. Interest rates drop, the dollar drops and inflation shoots up, that is my fear.

2) I heart savings: There has been a continued downward trend in US savings. I dunno, this can't be healthy. I'm not begging for a recession, but a bit of financial pinch may encourage consumers to save more, which may shore up the dollar and may even help restore some consumer confidence (especially for those consumers who right now are shaken by a drop in their home values and have no money in the bank.)

How to Avoid Recession? Let the Fed Work - New York Times

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