Good and Bad Credit

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On
Wednesday October 8 the Federal Reserve, European Central Bank,
and four other central banks lowered interest rates in an emergency
coordinated bid to ease the economic effects of the financial crisis.

The Fed, ECB,
Bank of England, Bank of Canada, and Sweden’s Riksbank each cut
their benchmark rates by half a percentage point. Furthermore, China’s
central bank lowered its key one-year lending rate by 0.27 percentage
points. According to a joint statement by the central banks,

The recent
intensification of the financial crisis has augmented the downside
risks to growth and thus has diminished further the upside risks
to price stability. Some easing of global monetary conditions
is therefore warranted.

The Fed’s decision
brought its benchmark rate to 1.5%. The ECB’s main rate is now 3.75%;
Canada’s fell to 2.5%; the U.K.’s rate dropped to 4.5%; and Sweden’s
rate declined to 4.25%. China cut interest rates for the second
time in three weeks, reducing the main rate to 6.93%. One day earlier
the Reserve Bank of Australia had lowered its policy rate –
the cash rate – by 1% to 6%.

Only a day
earlier Federal Reserve Chairman Bernanke announced that the US
central bank is ready to intervene in the commercial paper market.
The Fed will now buy commercial paper issued by corporations –
meaning the US central bank will make direct loans to corporations.

It seems that
Bernanke is ready to push trillions of dollars to keep the monetary
system alive.

Bernanke is
of the view that a major reason for the Great Depression of 1930s
was the failure of the US central bank to act swiftly to revive
the paralyzed credit market. By "swift action," Bernanke
means massive monetary pumping.

Read
the rest of the article

October
17, 2008

Frank
Shostak is an adjunct scholar of the Mises Institute and a frequent
contributor to Mises.org. He is chief
economist of M.F. Global.

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