Good and Bad Credit


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.

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October 17, 2008

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