Global economy gets global action on rates

The first time was in the wake of the Sept. 11 attacks.

Only last week French officials were emphasizing the need for a strict interest rate policy – and, in Europe, they were not alone. The coordinated action was perhaps a bit of drama designed to show unity in the face of danger, and to shock investors somewhat with the suddenness and scale of action.

"A cut of this size is designed to speak to the market not just today, but for many days to come," says Christian de Boissieu, president of the Council of Economic Analysis in Paris.•

Will it work? That is the trillion-dollar question.

In the near term, lower rates may help restore some confidence to US markets, according to an analysis by Wachovia Economics Group.

But more rate cuts may be coming, predicts Wachovia. The carnage in the markets has been such that prices have fallen below what market fundamentals might dictate.

The problem is that major economies are already on the edge of recession, or already in it. Thus avoidance of a widespread slowdown is unlikely.

"The US economy and most major economies likely will remain in recession through the middle of next year," concludes the Wachovia analysis, though it adds that the coordinated cuts "should help reduce some of the downside risk to the economy and ultimately lay the groundwork for a recovery."

Going forward, it is important to remember that central bankers can coordinate more easily than finance ministers, says Mr. Truman of the Peterson Institute.

Central bankers are more independent, while finance ministers are political. And as Europe's struggles to work together on bank bailouts have shown, "the finance ministers are not nearly on the same page," according to Truman.

Finance ministers are meeting in Washington later this week under the auspices of the International Monetary Fund, and there may be lots of argument about whether lax US lending and regulatory policies are now dragging down the rest of the world.

"It is a very tense time," says Ralph Bryant, a senior fellow and international economics expert at the Brookings Institution.

Each of the bigger European countries has at least begun to take action to shore up their banks. The US Treasury's Troubled Assets Recovery Program will continue its start up process in the days ahead, and that could help unfreeze credit markets, says Mr. Bryant. And, if nothing else, the coordinated rate cut was handled well, given that even the Chinese cooperated, he says.

• Staff writer Robert Marquand in Paris contributed to this report. Associated Press material was also used.

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