Monday, April 07, 2008

In the Financial Times, Charles Wyplosz, a professor of economics at the Graduate Institute in Geneva, argued that the U.S. Federal Reserve is overreacting and using tools that will not achieve its goals. Specifically, "If Mr Trichet thinks the US Federal Reserve is overreacting, he has a point. Economic conditions surely call for medicine, but the speed and scope of monetary easing is unheard of.

"More worrisome is that it may not be the right medicine. One ill is the bursting of the housing bubble, which is partly the consequence of the subprime folly of past years. Driving the interest rate to the floor will not solve the problem.

"Another ill is the continuing difficulty faced by banks as a consequence of reckless lending and poor investment judgment. The rebound of anxiety in the past few days amply demonstrates that massive easing of monetary policy is not working.

"The banking problem calls for surgical treatment, not interest rate Band-Aids. Certainly, surgery may result in bank failures. The time for administering painkillers will come after the operation, not before. Right now, the Fed is delaying the day of reckoning and, in the process, exporting the US’s problems by adopting policies that, intentionally or not, weaken the dollar."

Read Professor Wyplosz's complete commentary.

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