FED Actions

The main actions of the FED yesterday were, lowering interest rates and providing swap lines to emerging economies. The second action would play an important role rather the first one. As i said in the previous post, cutting interest rates would not restart the cycle, the swap lines would aid in restarting more than interest rate cuts. Swap lines would allow countries which have been hit by the liquidity crunch do to higher external liabilities, to access dollars directly from the US government. It is step in the right direction and would allow for orderly unwinding of the leverage. The main issue that US would face going forward is similar to the one it faced domestically,"which countries are too big to fail?". My view is that a better way to go about this problem would be to segregate countries in the three baskets i had given in the "delevering part ii" post. Countries which fall under category 3 would be the ones fit for swap lines. Countries under 2 would be better suited to go to IMF. IMF is well placed to handle it rather than the US government.

Are we looking at the foundations for another bubble..may be or maybe not. We got to see whether delevering is going to happen or not. Else we are in for a rough ride. Delevering is important as another important responsibility of many central banks is to have price stability. Going from one bubble to another would only make mockery of price stability mechanisms.