Wed, Sep 05, 2007 - Page 9 News List

Central banks must lower interest rates

The US Federal Reserve seems to be hoping that it can deal with the fallout from the subprime crisis without cutting rates and boosting spending

By J. Bradford DeLong

In all these cases, the liability holders -- i.e., the depositors -- have been promised liquidity, yet that promise cannot be kept if it is ever doubted. It is being doubted now.

Central banks should not focus only on keeping markets liquid. In the future, even liquid markets will be willing to intermediate fewer transactions than they were two months ago. So central banks must also focus on how the fall in the volume of money flowing through financial markets will affect spending, and on how much they should cut interest rates and expand money supply to offset these effects.

J. Bradford DeLong is an economics professor at the University of California at Berkeley. He was assistant US Treasury secretary during the Clinton administration.

Copyright: Project Syndicate

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