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The Rate Cut

This is the most important news of the day, probably the week and maybe of the month:

The Federal Reserve and six other major central banks from around the world slashed interest rates Wednesday in an attempt to prevent a mushrooming financial crisis from becoming a global economic meltdown.The Fed reduced its key rate from 2 percent to 1.5 percent. In Europe, which also has been hard hit by the financial crisis, the Bank of England cut its rate by half a point to 4.5 percent and the European Central Bank sliced its rate by half a point to 3.75 percent. . . One of the goals of the coordinated rate cuts is to spur nervous consumers and businesses to spend more freely again. They clamped down as housing, credit and financial problems intensified last month, throwing Wall Street into chaos. Many believe the United States is on the brink of, or already in, its first recession since 2001, one that could quickly spread to other countries around the globe.

Unlike 1929 (when FDR went on TV, according to Joe Biden), the Fed and its counterparts understand three things about about lessening the blow of a recession: Liquidity, liquidity, liquidity. We are heading into a recession and now the trick is to cushion the blow and make it as brief as possible. The $700B rescue package was one tool, the $900B commercial paper purchase effort by the Fed was another and rate cuts are yet another. The common goal is to keep businesses producing, hiring and investing.

On a political front this is perhaps the last rhetorical point left for John  McCain. By threatening to raise taxes — on anyone — Barack Obama is working at cross-purposes with the world-wide efffort to put money back into the hands of the private sector. It betrays a fundamental misunderstanding of the task ahead. That argument may not “work” to stem the Obama electoral tide, but it is right on the merits and the McCain camp and every Republican running for office have an obligation to make the case. And if Obama wins, perhaps by then the public will understand the dangers of raising taxes in a recession and implore their representatives and new president not to repeat the errors of the past.



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