By FLOYD NORRIS
As the credit crisis has slowly expanded and worsened, there has been a flurry of activity in Washington to reduce the damage from it. There are bailouts and tax breaks, and even checks to parents of school-age children.
But there is remarkably little action aimed at getting the credit system functioning again.
In part, that is because there is a scarcity of ideas. Paul Volcker, the former Federal Reserve chairman whose legacy has not crumbled since he left office, was right this week when he said the financial engineers had created “a demonstrably fragile financial system that has produced unimaginable wealth for some, while repeatedly risking a cascading breakdown of the system as a whole.”
But it is far from clear what should replace it, or if it can somehow be mended.
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In any case, the banks are not all that healthy anyway, thanks to their losses from the strange securities created under the new system.
There is a real risk that the ad hoc efforts now being made to deal with this crisis will create other problems. Mr. Volcker, who knows how inflation can get out of hand, said the current situation reminds him of the early 1970’s, when inflation began to accelerate. The Fed’s moves to slash short-term interest rates and bail out Wall Street, however necessary they may be, could easily raise inflation and cause more damage to the weak dollar.
NY Times