The Fed Did the Right Thing

The Ben Bernanke Fed did the right thing this morning by slashing the fed funds target rate by 75 basis points to 3.5 percent. A lower cost of money will gradually increase the demand for it.

Right now investors are totally risk-averse. There’s still a lot of cash-hoarding going on.

It is essential that the central bank pump in high-power reserves to expand the monetary base. By the way, the base has stopped growing for almost two years as the Fed permitted an inverted yield curve. All this choked off liquidity.

Meanwhile, we’re still waiting for the other international central banks to slash their money rates. Money is a lot tighter than people think it is. I don’t know what they’re waiting for.

As Congress looks at taxes, they should think about the one pressing need in today’s loan-problem story. Namely, asset values are falling. This needs to be stopped. The answer? Eliminate the capital-gains tax both for individuals and corporations. This will spark higher asset values by increasing the after-tax present value of future cash flows. They also should cut the corporate tax rate.

To put it simply, stop the multiple taxation of capital.

Last week Bernanke said the dividend tax-rate cut should be made permanent and that doing so would help the economy in the short-run. Good for him. Abolish the dividend tax altogether. It’s just more double-taxing of capital. Anything Congress does to reduce the cost of capital and raise investment returns will help.

We may be closer to a stock market bottom than many believe. This correction is already about 20 percent. There are a lot of great stock market bargain values. Smart investors always look to the long-run. Don’t worry about timing anything.

The world is not coming to an end. Our free-market capitalist system goes through periodic corrections and cleansings. It’s the natural order of things. Things are going to be okay.