Davos 2008 FED'S CUT TRIGGERS HARSH WORDS FROM DAVOS
Reactions to the US Federal Reserve's dramatic 0.75 percentage point cut in interest rates ranged from hostile to lukewarm as policymakers, businessmen and economists gathered at the World Economic Forum on Wednesday.
Economists at the meeting warned that the monetary easing announced on Tuesday would not succeed in boosting a sickly US economy. Moreover, they said, by reacting to turmoil in equity markets, the Fed seriously risked creating the impression that it was most concerned with ensuring investors did not lose money.
Stephen Roach of Morgan Stanley said that the Fed's policy of cleaning up after a bubble has burst was "a dangerous and reckless and irresponsible way to run the world economy". "It was market- friendly action," he wrote in his FT.com blog from Davos, asking: "Is that the way to run a central bank?"
Sir Howard Davies, the director of the London School of Economics and a former chairman of the UK Financial Services Authority, the UK financial regulator, agreed with Mr Roach. He said the move reminded him of the character Corporal Jones in the long-running UK sitcom Dad's Army, who always shouted "don't panic" just when he and everyone else were doing just that.
In one session, almost 60 per cent of the delegates voted in favour of a motion saying central banks had lost both their focus and control with respect to economic governance.
The reactions among delegates were not entirely negative, however. John Snow, chairman of Cerberus Capital Management and the former US treasury secretary said the emergency rate cut showed that "the question of whether the central bank is capable of bold action was answered yesterday".
Jacob Frenkel, vice-chairman of AIG, added the cut was "on the mark", indicating the drama and the severity of the situation.
But they were in a minority.
Professor Lawrence Summers of Harvard University - another former US treasury secretary - said: "It is hard to give central banks a high grade over the past two years on recognition of incipient bubbles or on their action to address them. Nor in the last six months when they were behind the curve."
Professor Nouriel Roubini of New York University, a long-standing bear on the US and global economies, agreed and called for a more symmetric approach from the Fed. "There was a Greenspan put and now there is a Bernanke put," he added, in reference to the perception that Fed chairmen always cut interest rates when investors lose money.
But the more worrying suggestion was that the action would not work. Professor Joseph Stiglitz of Columbia University, a Nobel prize- winning economist, thought the Fed had acted "too late". With structural forces in the US housing market and financial system likely to bring a contraction, it would be as effective as "pushing on a piece of string".