Fed move risks long-term pain for short-term gain

The Fed's "emergency" interest rate cut has reignited concerns that offering cheaper money as a solution to problems rooted in excessive lending and mispriced assets merely stores up problems for the future.
For the third time in less than 10 years, the US Federal Reserve suddenly changed the course of monetary policy, slashing borrowing costs by 50 basis points last week in response to unexpected stresses in the global banking and financial system.
Just six weeks ago it was saying the predominant policy concern was keeping a lid on inflation.
The European Central Bank and the Bank of England may not yet have followed suit, but both have effectively put planned rate rises on ice and injected emergency funds into the financial system as a result of the global credit seizure. Traders are now betting on a UK rate cut at least by January.
Analysts say such sudden policy switches are laced with moral hazard that stoke long-term risks in the global system.
Some reckon the Fed was left with a stark choice between the half percentage point cut it made in its key lending rates, or the risk that doing nothing could see a major bank failure after six weeks of financial market credit crunch.
But critics say the cause of the credit crunch the Fed was responding to has been uncertainty over the value and quality of US subprime mortgages - losses in which have been a direct result of what many see as years of ultra-cheap, lax lending.
Pouring in cheaper credit on top of that may ease the worst of the pain from the crunch, but the worry is that it does not solve underlying problems and risks losing focus on inflation.
"This is a problem where people have lost faith and trust in the quality of capital and it's not clear to me a half point cut in interest will restore that," said Avinash Persaud, chairman of financial risk consultants Intelligence Capital.
That policymakers see lower interest rates as an instant and appropriate response to banking problems, but doubt the effectiveness of higher rates to control asset bubbles fuelled by unfettered lending, is disturbing, Persaud said.