Bernanke Threads the Needle

BEN BERNANKE FOUND that narrow path between the rock and the hard place. He had to add liquidity to a credit market that is experiencing a crunch, and recognize that the economy is slowing, on the one hand, and not send a signal to improvident lenders and borrowers that all is forgiven–inviting them to sin again, with painless redemption assured.

So he lowered the discount and fed funds rates by 50 basis points–one-half percentage point. Here is what those moves are supposed to do. First, the lower discount rate will make it cheaper for banks to borrow against the collateral that they can’t borrow against in the seized-up credit market. That will help the troubled housing and mortgage sectors of the economy.