GOT LIQUID, NEED SOLID:

Bernanke's `Rookie Mistake' Forces Fed to Shift Focus to Market (Craig Torres, 8/20/07, Bloomberg)

Federal Reserve policy makers, who declared that inflation was their paramount challenge just two weeks ago, have been forced to make financial-market stability the trigger for changes in interest rates.

By lowering the discount rate and issuing a statement conceding threats to the economy, Federal Open Market Committee members effectively ripped up the economic-outlook statement from their Aug. 7 meeting. Some economists describe the about- face, coming after months of assurances that the subprime- mortgage rout was contained, as Chairman Ben S. Bernanke's first serious error since taking office last year.

``It was a rookie mistake,'' said Kenneth Thomas, a finance professor at the University of Pennsylvania's Wharton School in Philadelphia. The Fed ``underestimated liquidity needs'' of investors and the fallout from the housing recession, he said, adding, ``This demonstrates the difference between book-smart and street-smart.''

Bernanke, a former chairman of the economics department at Princeton University, has elevated the role of forecasts in Fed policy rather than amassing clues from dozens of market indicators as predecessor Alan Greenspan did. The Fed forecasts showed that ``moderate'' growth would continue, and that inflation remained the biggest danger. The credit collapse has undermined that stance, and Bernanke may cut the benchmark interest rate by at least a quarter-point at or before the Sept. 18 FOMC meeting, analysts say.

A U.S. tax cut is needed just as much as rate cuts, to provide the world economy a sufficient amount of secure debt instruments

Posted by Orrin Judd at August 20, 2007 6:47 AM