A quick haggle, a visit to the lawyers, and a bank is bought and rescued over a week-end in New York. Thatâ€™s the way to do it. It makes the UKâ€™s attempted private sector rescue of Northern Rock look ham fisted, long winded and ultimately unsuccessful in comparison. The US authorities have once again acted decisively, with vigour and purpose, to prevent the banking collapse getting out of control.
This week we can expect further interest rate cuts in the US following on the 25pt reduction in the discount rate announced overnight. All this US activity is producing two main lines of criticism of the US authorities which we need to consider.
The first is the criticism that inflation is not under control, so cutting interest rates in premature and dangerous. It is difficult to hold both this view, and the view that the US is now in recession or is about to go into recession. The Fed clearly fears the forces that are restraining activity and cutting jobs more than it fears the inflationary forces that are evident and left over from the easy credit days that have now gone. Whilst I remain sceptical about the claim that the US is now in recession, it does seem that the impact of the housing crash and the drying up of credit means the threats to activity levels are more important than the threats of further price increases. I back the Fedâ€™s judgement that their main enemy today is too little credit and activity, not too much.
The second common criticism is that by cutting so far so fast, and by using so much of its financial fire power at this stage, the Fed will have nothing left if it fails to work. This is an even more bizarre argument. It is saying if you use your umbrella in the wet and the wind today you may damage it, so it will not work next time. If you take that view everytime the weatherâ€™s bad what is the use of the umbrella? The Fed has good reason to suppose this is just the kind of crisis it has to respond to strongly by cutting interest rates and putting liquidity into markets. If they get it right they will make a relapse less likely. If they do not try with what they have there will be a very serious banking crisis.
Since last August I have been commenting on how different the approach of the US authorities is to the approach of the UK authorities. It has taken just four days to rescue the assets and what remains of the business of Bear Stearns. More than six months have passed and we are still a long way from finding a private sector rescuer for Northern Rock. The Treasury and the Bank now have much less flexibility to deal with any other financial catastrophe, because their balance sheets are stretched by taking on the Rock. Meanwhile the Fed is well on the way to laying off its problems with the Bear.