The Federal Reserve's aggressive rate cut, together with its moves over the past week to shore up liquidity in financial markets, show it will do whatever it can to mitigate the risk of a long and deep recession in the United States.
Unfortunately, doing whatever it can is
not the same as doing whatever it takes.
There are limits to what even the mightiest of central banks can do.
It faces a vexing trade-off between short-term and medium-term considerations.
The markets had got themselves into a state where emergency action was required.
But the Fed can only cut rates so far.
The real limit is not the arith-metical one, zero. It is driven by the fact that, like New Zealand, the US has an inflation problem.
As inflation expectations rise so do the long-term interest rates from which US mortgages are priced. Running risks with inflation is not doing any favours for people whose mortgages are due to come up for an interest rate reset.
Or for the housing market whose parlous state is the US economy's underlying problem.
Addressing that problem is almost certain to require government action.
UBS, for example, has called for the establishment of something akin to the Resolution Trust Corp which was set up in the wake of the savings and loan crisis, to buy foreclosed and vacant homes so as to underpin house prices.
Professor Joseph Stiglitz favours measures to avert counter-productive foreclosures in the first place.
Naturally there is reluctance to contemplate a "privatise the gains, socialise the losses" scenario.
There is a serious moral hazard here: bailing people out of the consequences of their reckless behaviour only encourages more of it in the future.
But unlike the bursting of the dot-com bubble, this is a crisis which hits Americans where they live, literally, and in a globalised world their problems become everyone else's really quickly.
Whether the lame duck Bush Administration and an election-year Congress is up to the task remains to be seen.
The ineffectual response to another calamity, Hurricane Katrina, does not inspire confidence.
And confidence is what is needed right now.
