Tuesday, September 11, 2007

If Not Now, When?

While investors sit around staring at their screens waiting for next Tuesday, perhaps a few words re the arguments pro and con a rate cut would be a worthwhile exercise.

The argument for a rate cut is predicated on the assumption that the US consumer, under increasing economic stress, will cut back on his/her shop-‘til-I-drop mentality thereby impacting global growth, potentially bringing the world economy to its knees.

A supporting element of the rate cut argument is the disbelief that decoupling (global growth continues without the major support from the US consumer) will fill the gap and sustain global growth and corporate profits and profitability.

A final point supporting a rate cut is the holdover belief that a preemptive approach to matters economic should be maintained. This was a staple of the Greenspan era and one that many still advocate.

The counter arguments made against a rate cut center on the beliefs that (a) decoupling, even in a less than completely robust form, will be more than sufficient to sustain global growth (even if individual regions and/or countries suffer to some degree), (b) a long, overdue adjustment of financial innovation-juiced growth is necessary, and (c) issues like structural imbalances (global demand, current account deficits, trade deficits) must be corrected.

Supporting the no rate cut argument is the fact that the combination of corporate and emerging countries’ financial condition has never been better thereby enabling any pain to be experienced will be manageable.

In my humble opinion, the latter should be allowed to play out further. In other words, a rate cut blast to the entire system (the point of yesterday’s little soap opera dialogue) is neither warranted nor appropriate at this time. The targeted, surgical approach currently employed by the Fed should continue and the blockages in the financial system should be addressed directly versus a blast the system Fed rate cut.

Now, for those that say that unless the Fed acts now with a rate cut a recession is inevitable, I offer this: If you could not foresee the credit fiasco we are now experiencing why should we believe you now?

What if you are wrong and a recession is not just around the corner? What if global growth remains reasonably robust? What if the US economy was poised to simply experience a slowdown and not a recession? If so, what is the likely consequence of an economy-wide rate cut? Perhaps an overheated global economy?

If bad behavior (which includes financial innovation-juiced deals and the structural imbalances points noted above) and questionable decision-making needs to be changed, what better time to make that change than the present – when the global economic wherewithal exists? If not now, when?

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