Bitter medicine

I wrote about the need for character in these troubled times, and hours later 'Helicopter' Ben obliged (would love to claim some credit for it!!). The US Fed has (rightly and bravely, in my humble opinion) ignored the 80% probability of a 25 bips rate cut that bond traders were betting on, and kept rates unchanged. While this probably means more pain for beleagured over-leveraged entities (like AIG?), it is good for the markets in the long run.

If I remember right, this (and the decision to let Lehman sink) is the first time that the Fed has signaled that it is walking away from bailing out failing institutions using taxpayer's money. This is good since it removes the obstacles from the forces of capitalism's 'creative destruction' - weaker firms will fail, painful de-leveraging will occur, and the business cycle will continue. Certainly this means more pain in the short term, but the writing on the wall is loud and clear - if managements of financial firms suffer from the same hubris or lethargy in dumping toxic assets / raising capital that Lehman did, then they too will suffer. This is good because it will prevent the buildup of insanely easy credit the next time around. Prevent? Maybe not - but it certainly should make a comeback more difficult.

At the time of writing this, the Dow Jones index has greeted the fed announcement with a knee-jerk 100 point drop. Looks like the behavior of a sulky child to me.