Submitted by Milton, Feb 8, 2008 23:20

Our dear departed Dr. Friedman was fond of saying inflation is always and everywhere a monetary phenomenon. Lowering interest rates the way the Fed has done lately carries with it two primary threats.

1. It will serve to monetize the increase in food and energy price level increase making it permanent inflation.

2. Cutting rates 1.25% in eight days sends panic signals to the markets and may create additional moral hazard if investors/banks read those moves as signs the Fed will "bail them out" if they engage in ill-advised enterprise.

Alan Greenspan, who is taking a lot of heat from the monetary Monday-morning quarterbacks these days, moved rates much more slowly and maintained stability. He may be partly to blame for keeping rates too low for too long in the early 2000's creating the moral hazard that led to the subprime debacle, but the manangers who originated those loans, packaged them, and sold them off knowing some of them would be bad, and the people who took out interest only ARMS on houses they couldn't afford, deserve the lion's share of the blame.

The Fed should send clear signals now that they are holding firm at 3% and allow the markets to purge the junk. Besides, a mild recession wouldn't necessarily be such a bad thing right now. Personal debt has been rising at over 9% for over five years now. People need to save more and live within their means. A recession would jar them back to reality.

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