I perfectly agree with the previous post of my co-blogger fg. The interest rate cut of the FED is not an instrument to reduce systemic risk. But I would go a step further: the easy-money policy of the FED (and to a lesser extend of the ECB) is the cause of the current malaise and any further softening of the monetary stance just postpones and thereby accelerates the crises. It is like giving drugs to those addicted: it just eases the immediate pain at the cost of later and harder suffering (here is a very nice article ('Our Subprime FED') by O'Driscoll puplished in the WSJ). As I posted here and here, excess liquidity is the cause of the recent financial turmoils and thus cannot be the cure.
Perhaps all this is just a consequence of our (i.e., the economic profession) insistence that the money rate of interest is just an exogenous rod, a policy-variable like the budget decifit with no inherent meaning or function independent of policy. Bowing to the whims of the central bank (or rather to what "stability" means to mainstream economists) the insight is almost lost that the rate of interest in an unhampered market economy may reveal information about the optimal structure of production, about the social rate of time preference and thus about the quantity of resources not consumed and thus supplied as a gross fund to be invested. It is the legacy of Keynes and many monetary cranks before him that the rate of interest is seen as something alien - or better superordinate - to the rest of the economic system. In the General Theory unemployment prevails not because wages are too high or too rigid, but because the alien/superordinate price of money is too high and - what is even more important - not endogenous the struggling of the unemployed labor force. What is the essence of Keynes' General Theory is that the rate of interest is not determined by relatice scarcity but by the whims of the capitalist class (with the nominal money stock given) - a class Keynes wants to destroy via easy money. The rate of interest is therefore not embedded into the price structure, the communication system of relative scarcities, but is bound to animal spirits, that is, to behaviour which may be typical for the owning class but which is not only dispensable but rather damaging! Today, the nominal stock of money is not treated as given and the preferences of central bankers (and economists) are substituted for the whims and spirit of the capitalist. But the rate of interest remains outside the price system, without any genuine function it could perform on its own. The dispute is just over the interest rate being too high or too low, but nobody seems to argue that it is the role of the market to determine the "right" level of the money rate of interest and that we cannot predict the equilibrium level of interest as we cannot predict the equilibrium price of apples, cars or capital goods. The best thing we can do is to leave the rate of interest to the market (after we have implemented a 100% standard and therefore ensured that the same resource-unit is not "used" to finance alternative projects at the same time; since Aristotle's 'law of the excluded middle' claims that you cannot eat your cake and have it, too). We economists - even the best of us - have to face the fact that we do not know the equilibrium rate of interest, seldom ex post but certainly never ex ante.
We may model optimal policy rules but as long as we employ a monetary theory of the rate of interest our models will provide us with the same predetermined result: that we need policy to close the system. Garbarge in; garbage out!
