WSJ Wants Fed to Strengthen Dollar
The Wall Street Journal Editorial Page offers advice to the Federal Reserve for their Open Market Committee meeting tomorrow. They see strengthening the dollar as key to moving past these troubled economic times:
Which brings us to tomorrow’s Fed meeting. The markets are expecting another cut of 50-75 points in the benchmark fed funds rate, and if recent history is a guide will immediately price into futures another 50-point cut down the road. The stock market may rally, until it once again decides that easier money can’t remedy what is fundamentally a problem of bank solvency. That problem can only be resolved by financial institutions and regulators coming to grips with the losses, raising more capital to cushion the blow, and closing or selling those banks that can never recover. That will require a more aggressive, and pre-emptive, regulatory role for the Fed — and that we would applaud.
What the U.S. and world economy don’t need is a Fed that continues to insist that inflation expectations are “well-anchored” when everyone else knows they aren’t. The Fed needs to restore its monetary credibility, or today’s panic could become tomorrow’s crash.
They argue “[t]he flight from the dollar has made U.S.-based investments less attractive, at a time when the U.S. financial system urgently needs to raise capital.” Such a situation has pushed the Fed into financing the buyout of Bear Stern.
This situation doesn’t look so much as a problem of a lack of liquidity but a lack of confidence. Financial firms don’t know how to properly price mortgage-backed securities. So they’re not lending as much which reduces economic activity. Like the shake out in housing markets it’s going to take time for financial whiz-kids to find the good bets and to unwind the bad ones. it will also take time for firms to regain trust in other organizations (or new ones) like investment rating firms. Additional foreign capital spurred by a stronger dollar would help the financial markets bide their time.
“The Buck Stops Where?”
[picture via shyb]
