If that's the case, then the Fed might as well lower rates to their natural market level using the yield curve. That would keep them from punishing everybody for the actions of a few.
Can’t agree.
One of the reasons why we’re in this mess is that Greenspan chopped rates too low, too fast, reacting to 9/11 and successive events that had hard-to-quantify economic costs.
Interest rates where they are isn’t bad, and they’re low by historical standards. The Fed would do better to stand pat and work on raising standards for lending.
The last thing a central bank should do when the market starts to correct an asset bubble is try to take the pain out of the correction. The home lenders who are going to have problems — it isn’t possible to save them. They bought assets priced unreasonably high in valuation, with debt that is poorly structured. That’s all there is to that, and a Fed cut won’t help them. The Fed doesn’t change any interest rate that is used in the computation of a mortgage rate. The Fed changed only the discount rate, or inter-bank rate. The market sets the benchmark rates for mortgages, and the market has decided to start asking more because the market is learning just how poor a risk many of these borrowers are/were.
A Fed cut would, however, help the investment banks, hedge funds, et al, by giving them more liquidity to play with. This is the last group who should get any help from the US taxpayer. This is the group who must be made to feel pain, and feel lots of pain. Without pain to drive the lesson home, they’d come to expect the Fed to bail them out.