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You are spot on mate. Here's another example of the same terrifying self-destructive syndrome. The move before "slash interest rates" was "huge tax rebate." Another type of "steroids to hide the fact that the economy's in a coma" move. When the world markets saw that Uncle Sam's response to the crisis was "steroids" they devalued the dollar even more. That is, Bush's "flood consumers with cash" suggestion was embraced by the Democrats and Republicans even though it's the exact wrong message to send to the world.

>The "hair of the dog" is not a good hangover cure.

That's just not true! With regard to economics it is though.

Let me confess a great deal of ignorance about macroeconomics. But I guess the Fed's policy *could* make sense in two ways: (1) The current Fed doesn't want a big recession on their its watch so it is postponing complete adjustment of markets or, perhaps, thinking that it could make the adjustment more gradual; (2) Markets are overreacting to the subprime mess or so the Fed thinks. So it is trying to reassure agents that things will not get "too" bad and so they should not reduce their normal activity. I guess this is more or less equivalent to "irrational expectations."
However, notice all the sophistication of recent macro models seems to lead to the same old remedies! Or maybe the Fed is not "up-to-date" on its macro!

My key assumption about the Federal Reserve is that they are afraid of bank failures. I say this in light of the recent multi billion dollar losses, i.e. Citi. While I am not endorsing any Fed action, my interpretation of their actions is that they are trying to maintain solvency, not spark additional loans and investment. By lowering the interest rate, done through its open market operations, the Fed is injecting cash into the ailing balance sheets of banks. This assumes that the banks will not issue new loans with the new cash. I am not endorsing this program as wise or appropriate, but in that I do not see it spawning a new round of lending it does not necessarily strike me as "hair of the dog."

"excessive supplies of credit enabled mortgage lenders to give out high loan-to-value mortgages right and left"

First, I would argue that it FORCED them to do so via competitive pressures.

More importantly, however, I think the Fed and many others still believe that it is flaws in the banking and market system that are at the root of the problem, not Fed policy. Hence, the do not see the irony of their actions.

There's no contradiction. The bubble is bursting (really has already popped) and they want to keep it going.

Even if they regret the earlier cheap credit, preventing a big fall is no doubt politically desirable, and maybe in some ways economically -- if they think they can get a soft-landing instead of a worldwide crisis.

This was an age of innocence and happiness.God bless you all, and God bless America !

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