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The World from Berlin

The Fed's 'Don Quixote Fight'

Was it a bold move to get banks lending to each other again or a sign of desperation? America's Federal Reserve cut interest rates for interbank loans to almost zero percent on Tuesday. German commentators veer between praise and concern that it is laying the foundations for more trouble in the future.

The United States Federal Reserve has taken its boldest or most desperate step to fight recession, depending on how you look at it. The US central bank announced on Tuesday that it was cutting its benchmark interest rates to as low as zero in the hope the move will encourage banks to start lending to each other and make it cheaper for Americans to borrow money.

The Federal Reserve, or Fed, said that is was cutting the interbank federal funds interest rate -- the interest that banks charge each other for overnight loans -- to between zero and 0.25 percent, down from 1 percent. The Fed's action was unprecedented in the central bank's 95-year history and Wall Street immediately embraced it. The blue chip Dow Jones industrial average closed up 359, a 4.2 percent gain.

In addition to the rate cut, the Fed said it was prepared to "employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability." This could include purchasing debts issued or guaranteed by government-sponsored mortgage agencies or buying US treasury debt. Early next year the Fed plans to roll out a $200 billion program to boost the availability of a variety of loans to consumers.

Some analysts now question whether monetary policy alone can prevent the recession from steaming ahead, with many arguing that the onus is now on the government to increase public spending. President-elect Barack Obama is promising a massive public works program to help lift the US economy out of the doldrums; and on Tuesday he warned that the Fed was running out of traditional tools for combating recession. "That's why the economic recovery plan is so absolutely crucial," he told reporters.

The Fed's announcement came on the same day as news that consumer prices had fallen by a record 1.7 percent in November, raising fears that the country is heading for a dangerous period of deflation. Meanwhile, data released last week showed that 533,000 people lost their jobs in the US last month, the fastest rate in 34 years.

With banks still reluctant to lend to customers and fearful Americans sharply cutting back on spending, it remains to be seen if making borrowing cheaper will have the desired effect.

On Wednesday, German editorialists weigh in on the Fed interest rate cuts and while most describe the move as bold, many also warn it has an air of desperation.

SPIEGEL ONLINE writes:

"The Fed is resorting to the last of its possible interest rate cuts in its Don Quixote fight against the financial and economic crisis, against recession and inflation. There has never been zero percent there, that is something known only from the Japan of the 1990s."

"The 'zero effect,' whereby banks will borrow money from each other and from the Fed at zero percent, is symbolic more than anything. The credit markets are so frozen that the de facto interest rate was already just above zero."

"The Fed is trying to send a strong, clear and loud message. It is heralding a new phase: It can't push down interest rates any further. From now on it will use more aggressive, untested means, to warm up the credit markets."

"Behind the assurances that the Fed 'will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability,' there is another promise: to print an enormous amount of money. This is how the Fed wants to come to the aid of banks, businesses and consumers."

The business daily Handelsblatt writes:

"The US Federal Reserve is testing the limits of monetary policy. It has reduced interest rates to an area that is just above zero. This is more than many expected. It represents the limits of what is possible."

"The step reveals both desperation and courage. Desperation is enormous in an economy that has been in freefall since the collapse of Lehman Brothers in mid-September and that all the bailout programs have failed to help. The desperation was so great that the Fed has made the cost of money cheaper than ever and has at the same time declared: There is nothing more here! In this area at least we have nothing in reserve!"

"This disclosure also shows courage. The bank is placing all its bets on the interest rate cut and is playing this hand decisively. Of course it could start printing money, if this last step doesn't work. However, they played their most important trump card yesterday. Everything else that they can now do is just padding."

"Others, however, can do more. Politicians should now use a government economic stimulus program to make this cheap money take off."

The conservative Die Welt writes:

"The US Federal Reserve is flooding the capital markets with money and is taking a dangerous gamble. Unlike the European Central Bank, the Fed doesn't have to worry about the volume of money in circulation and can happily open the floodgates in order to boost business between banks and make it easier for businesses and home owners to borrow. This will help the economy get back on its feet and prevent deflation, which would have made debt relief impossible. Now investors can look forward to a stabilization of the US markets, but they will also have to deal with an increasingly weaker dollar. And there is the suspicion that the Fed is now fighting fire with fire. The unbelievable amount of liquidity in recent years had led investors and debtors to believe that there was some inexhaustible source of money somewhere. That revealed itself to be a brutal fallacy. If the Fed doesn't do enough this time to take countermeasures then it will lose this gamble on a sustainable recovery. And we will have seen the beginning of a new bubble last night."

The center-right Frankfurter Allgemeine Zeitung writes:

"With its surprisingly sharp interest rate cut the US Federal Reserve has sent a clear signal. The economic situation in the US has recently become extremely troubled. The Fed has to and wants to take countermeasures. This has been welcomed by the financial markets. A less clear reduction of the target rates would only have been symbolic. .... However, the Fed now has few cards left to play and must look to other forms of ammunition. One option is the purchase of government securities. ... The fight against recession is far from over."

The left-leaning Berliner Zeitung writes:

"The US Federal Reserve has gone whole hog. It has slashed interest rates to almost zero percent. This means that banks can borrow money from the Fed for practically nothing, and then lend it on to companies for a certain interest rate or park it in short-term government securities. ... The interest rate reduction, therefore, means in practice a further state bailout worth billions for US banks."

"The Fed's decision was brave. ... The Fed has also made clear that it views the banks' situation and that of the entire US economy as extraordinarily urgent. The biggest economic market in the world is facing the worst recession since the 1930s. That is why the Fed has decided to play all the cards it is holding."

"In the biggest emergency, there should be no taboos for the US Federal Reserve. It made that clear yesterday when it announced that it would use all the available instruments to get back to sustainable growth and to maintain price stability."

The center-left Süddeutsche Zeitung writes:

"The head of the US Federal Reserve Ben Bernanke has broken a taboo. He has cut the interest rates to a level that makes them ineffective, and so is acting like a pilot who turns off the most reliable instrument on the airplane. From now on the biggest central bank in the world is flying manually into thick economic fog. Can this work? Is it not extremely risky? Is Bernanke possibly imposing more damage than his predecessor Alan Greenspan, whose low interest rates created the conditions for the rampant borrowing and who proclaimed the spread of the risks from the US to the rest of the world?"

"Bernanke also makes mistakes. The collapse of the Lehman was a mistake and its effects on the financial markets will be judged as marking the transition to the bad times."

-- Siobhán Dowling, 12:45 p.m. CET