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Can Fed Cuts Quash Volatility?

Publication Date: 
March 18, 2008
Zach Carter

Remarking on the possibility of a recession and the Bear Stearns bailout by the Feds, SNLi is wondering if the Fed's actions are merely prolonging the agony. Professor Kenneth Scott is quoted:

"I think they are in a very sticky situation, but it's not one that can be cured just by flooding the market with cheap money," Stanford University Law School professor Kenneth Scott told SNL. "The parallel that comes to mind that I hope is not a parallel is to the Japanese banks when their bubble burst in December of '89. The Japanese central bank handled it as an interest rate and liquidity problem, and they ultimately lowered the interest rate on advances from the central bank down to essentially zero."


"They were pouring money into the system, and what that was doing was prolonging over what was ultimately eight years, the recognition of losses by the Japanese banks," Scott said. "They were kept afloat, but they were not facing up to the losses that they had taken, and that continued to act as a real impediment to the revival of the economy."


But a consumer spending boost would not address bad mortgage debt. "Everybody knows that, in effect, there are a lot of unexploded mines out there," Scott said. "There are losses that haven't yet been taken and haven't been put on the books."


"They're not supposed to federalize losses, that's not the job of the central bank," Scott said. "That's a fiscal decision that it seems to me is for the government, the Congress to make. It's not really the responsibility of the Fed, and they don't really have the necessary authorizations and tools to deal with it."