Commentary: Rates cut expedient, but not enough

By Li Hong (chinadaily.com.cn)
Updated: 2008-10-09 11:06

The public fear about a churning credit crisis, which is now engulfing developed countries, may grow and leave all corners of the globe severely battered in the end. The fear is not soothed by the coordinated interest rate cuts implemented by major central banks on October 8.

The direction-pointing Dow Jones industrial average closed down a further 189 points, or 2 percent, on the day after the Federal Reserve, the United States central lender, announced an emergency 50 basis points reduction in the federal funds rate. The three major European stock indexes, in London, Paris and Frankfurt, got another pummeling, all tumbling by more than 5 percent.

And, it seems likely the Asian markets, from Tokyo to Hong Kong and Shanghai, which dived 9.4 percent, 8.2 percent and 3.0 percent respectively on October 8, are expected to struggle to find a footing and stop financial painful bleeding in the coming days.

Why does the lingering fear or the spiraling down of public confidence stubbornly refuse to go away? It originates from the cancerous subprime housing mortgage loaning default, in the US, followed by Britain, Germany and other developed nations. This domino-effect led to a beating on Wall Street, mocking at the world's most "advanced" financial system.

Now, everyone, from the cash-rich big banks to small community lenders, shut their pockets, hesitating to lend or charging exorbitantly high rates on borrowings. Businesses are effectively cut off the blood of credit, and consumers shudder going shopping, afraid of borrowing on their credit cards, which are getting just too expensive.

The economy of the world's largest and the most advanced countries, the United States and the West, faces a genuine threat of a breakdown, and a recession there will certainly spill over to developing new economies, including Brazil, Russia, India and China, the so-called "Golden Brick" countries. With deepening globalization, the world is tied together. No one is going to escape unhurt.

Yesterday in New York, investors, who have been hankering for a rate cut, initially had a sigh of relief following the worldwide concerted rate cuts by the central banks, including the People's Bank of China. However, they are also aware that in the short run, the world's credit is dried up and will remain so as banks in the West are reluctant to lend. Two days ago, the US central bank even began an unprecedented and risky initiative to loan short-term money directly to starving small- and mid-sized businesses.

In a sense, the worldwide rates cut, though a substantive move, is more of an emergent and an expedient one. It can hardly resolve all the problems alone, and at once. It is a good medicine, no doubt, but a 0.5 percent rate cut is not enough to cure the poisonous disease.

Some said the US$700 billion financial rescue plan approved by the US Congress and government a week ago, aimed at restoring market confidence in the banks, looked just like a pebble tossed into a ferocious sea. The market hasn't stopped hemorrhaging, and neither will a single rates cut do much either.

In the short term, the world must watch closely and work unconventionally and collectively to build up a fragile comfort of confidence, which yesterday's concerted rates cut has brought us, and carefully persuade the banks to lend to each other, to businesses and consumers. If the effort is successful, a worst-case scenario of panicky withdrawals from the lenders, leading one bank after another to go under, will be avoided.

For the long run, the Chinese culture and lifestyle philosophy, that one ought to live conservatively while not lavishly, that one ought to save for the children, while not spending the money that our offspring will make, is ingrained. When one is stuffed with deep pockets, he or she is not afraid of difficult times ahead.

And, the policy-makers and economists who consult the decision chieftains should learn from the current financial crisis, and try their best to prevent bubbles from enlarging, no matter if they will involve the fields of real estate, or stock markets, and avoid overzeal in inventing lucrative but toxic investment appendices.