False Savior: If recession is the fear, a tax cut is better than easy money.

Wall Street Journal ^ | 12 December 2007 | Editorial Staff

[shrinkermd]

...Wall Street's argument is that the housing recession and credit crisis threaten a larger downturn. The 30-day T-bill rate (under 2.9%) has sunk far below the fed funds rate of 4.25% after yesterday, so the Fed is said to be "behind the curve." We're told the banks caught up in the mortgage problems also need more "liquidity" if they're going to lend. Thus pesky details like $90 oil and the flagging greenback can be reckoned with later.

Life would be grand if central banking were that simple. The Fed's main obligation is to protect the value of the currency, especially in a world where the dollar is the main value of global exchange. With commodity prices at record levels, and the dollar close to record lows, Chairman Ben Bernanke and his colleagues are already perceived as responding too readily to Wall Street and Capitol Hill. They can't afford any more citations for reckless driving, and their caution yesterday seems more than justified...

...The better policy mix is the one implemented by Ronald Reagan and Paul Volcker that broke stagflation in the 1980s. The Fed restored dollar credibility and avoided asset bubbles, while tax cuts spurred incentives to work and invest. Even on Keynesian grounds, a tax cut now makes sense if you're worried that the housing recession will slow consumer spending. An across the board tax cut on marginal personal and corporate income tax rates would also attract capital from around the world, increase the demand for dollars, and thus make the Fed's job easier.

[BlabItGrabIt]

Guess AMericans no longer concerned about taxes going up within eighteen months from today??