Friday, August 17, 2007

Wise Move or Foolish Intervention?

Fed Intervenes to Calm Markets

Washington Post Staff Writers Friday, August 17, 2007; 10:24 AM

The Federal Reserve today cut a key interest rate by a half a percentage point, moving to ease a credit crunch and calm global stock markets by making it cheaper for financial institutions to borrow directly from the central bank.

The Dow Jones Industrial Average surged more than 300 points in its opening minutes before settling back to smaller gains, as investors reacted to news that the Fed had reduced the rate at its "discount window" to 5.75 percent from 6.25 percent. European stocks, which had traded slightly lower through the morning, shot up roughly three percent at midday.

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One of the reasons the Federal Reserve exists is to inject money into the system when panic has distorted the market.

The question is (always) what is appropriate? There are those (and I am among them) who feel the current problem is a very ordinary and necessary readjustment to a long period of foolish exuberance based upon greed.

Letting the markets correct themselves when that's necessary is another reason the Fed exists.

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* For more in-depth articles from Jim on Business and Economy, check out Opinion-Columns.com