[link|http://www.bloomberg.com/apps/news?pid=20601087&sid=aMr45.9VOKes&refer=home|Bloomberg]

The Federal Reserve unexpectedly cut its discount rate and said it's prepared to take further action to ``mitigate'' damage to the economy from the rout in global credit markets.

The central bank reduced the rate at which it makes direct loans to banks by 0.5 percentage point to 5.75 percent. Policy makers kept their benchmark federal funds rate target unchanged at 5.25 percent. It's the first reduction in borrowing costs between scheduled meetings of the Federal Open Market Committee since 2001 and Ben S. Bernanke's first as Fed chairman.

Interesting move because there was no warning at all. This is also contrary to Bernanke's stated goal of making the Fed follow written guidelines and spell out their goals more clearly.

I think the Fed has realized that we are on the edge of a real disaster, and that they had to do something to make some more credit available.

Jay

I don't know about Bernanke, he is new at this. But under Greenspan it usually worked the other way around. With the White House coming to Greenspan and asking him to do or not do something and Greenspan mostly ignoring them and doing what he wanted.

More over, with the subprime crisis part of the problem all along has been that nobody knew what would happen. There where so many layers of private deals, structured deals and leverage that nobody knew what the real risks where.

Jay

I have this notion that there is a room with a bunch of people locked up and all they do is think and talk about things. They take a look around them and postulate all the possible consequences and then leak the info. Whoever is smart enough to figure out the correct trend is the winnah!

Actually your pretty close. There are lots of analysts and economists that do just that.

The problem is that if you ask 100 economists what the economy is going to do you will get something more then 100 answers with a value range of - infinity to + infinity.

The number that get it right on a regular basis is so small that it can be attributed entirely to random chance.

Jay

I realize that the world is chaotic, but with the amount of brain power and computer power we have available, I find it beyond comprehension that policymakers can be caught with their pants down. I guess all the years I spent as a debater has taught me to look at a situation from all the angles and it is second nature, so I just expect others to do the same. Then again, if no one (current admin) listens when someone actually speaks the truth...

It's the nature of economics. Pretty much every economist knew this bubble had to come down eventually. But when is the big question, if you take hard action before the bubble bursts you will strange the economy under regulation and overly tight money, if you wait to long the economy will shatter under you or inflation will rampage out of control.

And given the lack of good advice about when the bubble will burst plus the tendency for those at the top to prefer the rose colored glasses view, it is natural that they tend to wait a bit too long to take action.

Personally, I think the Fed may even be over reacting a bit here. In the long run the bubble has to burst. The job of the Fed is too let it down slowly, not to prop it up. The Fed pumping liquidity into the market may stave off the problem for a while but only at the expense of running up inflation. And if the bubble bursts while inflation is rampant it will just be that much worse.

Jay