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Fast-Moving Economy Challenged Architects of Stimulus
President Bush signs the economic stimulus bill, which will provide checks to many Americans.
(By Gerald Martineau -- The Washington Post)
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As the scale of the crisis has become more apparent, though, those measures have come to appear small-bore. By the time the administration introduced a plan to freeze interest rates on certain subprime mortgages in December, many in Congress were criticizing Bush for moving too timidly to deal with the housing crisis, a criticism that was repeated this week as the Treasury Department rolled out a plan for major loan servicers to delay foreclosures to renegotiate loans.
As Treasury Secretary Henry M. Paulson Jr. acknowledged Tuesday, "None of these efforts are a silver bullet that will undo the excesses of the past years."
The Federal Reserve has grappled with similar problems. In September, the central bank cut the short-term interest rate it controls by half a percentage point, more than investors were expecting. At the time, Fed leaders viewed the action as an exercise in "risk management," a bold signal that they were on the case and would act to prevent the problems in financial markets from spreading to the economy as a whole. The same philosophy was behind rate cuts in October and December that were made despite worrisome signs of inflation.
"More than usually, the potential actions the Federal Reserve discusses have the character of 'buying insurance' or managing risk -- that is, weighing the possibility of especially adverse outcomes," Fed Vice Chairman Donald L. Kohn said in a November speech.
In the time since then, however, it has become clear that those rate cuts were not buying insurance at all but rather just keeping up with worsening economic fundamentals.
"Whatever you thought might be the conditions when you made those decisions, the actual conditions have turned out to be worse," Harris said.
With an even more aggressive set of interest rate cuts in January totaling 1.25 percentage points, the central bank was once again trying to get in front of the problem. It was an open question whether even that move, the biggest one-month rate cut in the modern history of the central bank, would be enough to arrest the worsening economy and interrelated climate of fear in financial markets.
Some traders in financial markets are betting it won't. Prices in options markets indicate that investors believe there is a one in four chance that the central bank will cut rates by another full percentage point at or before its March 18 meeting.
"Those big rate cuts in January at the time seemed aggressive," Harris said. "Now as we see the evolving problems in the capital markets, the data coming in, it looks different. It might have been risk management a month ago, but now it's just good policy."
