Posted by: Michael Mandel on March 12
When faced with a budding financial crisis, the good central banker does a two-step dance. First, he (or she) staunches the bleeding, closing insolvent financial institutions, tightening lending standards, and otherwise making sure that bad loans stop being made. The good central banker then takes the second step: Pumping liquidity into the markets, to make sure that otherwise solvent institutions do not go under because the bad ones close.
The Fed and other financial regulators are considering tightening the standards on subprime lending. If they go through with their proposal, then quite a few subprime borrowers would be unable to refinance. Good central banking practices would suggest that an interest rate cut would be in order as well.
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