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Is Easy Money The Way Out?

As we told you yesterday Ben Bernanke didn’t want to take any chances by disappointing the Street. As was widely expected the Fed slashed interest rates by half a percentage point on Wednesday.

Specifically, the central bank reduced its target for the federal funds rate, the interest banks charge on overnight loans, to 1 percent, a low last seen in 2003-2004. The funds rate has not been lower since 1958, when Dwight Eisenhower was president.

The cut marked the second half-point reduction in the funds rate this month as officials explore a wide range of measures in an effort to revive an economy hit by a long list of maladies stemming from the most severe financial crisis in decades.

However the Street didn’t have any issues disappointing the Fed. Even with the rate cut the Dow gave back gains and closed in negative territory.

Is easy money the way out?

"I think the rate cut was positive. Lower rates certainly beat higher rates," says MKM Partners chief economist Mike Darda on Fast Money. "They’re putting a massive amount in the liquidity in the market. It helps but it doesn’t solve all our problems."

Not everyone thinks that changing interest rates is the best tool for addressing the current crisis. One of those people is celebrated short seller Bill Fleckenstein. He tells us, “The Fed’s operational philosophy seems to be 'we can do no wrong' and they need to shift to 'we can do no harm.'”

Fleckenstein feels when the interest rate is too low it creates bubbles. In essence that’s what happened earlier in the decade with the housing market. “We wind up with excess risk taking and ultimately in a terrible situation,” he says.

Fleckenstein’s Solution

Essentially Fleckentein thinks the Fed should not pick interest rates but rather target money supply or credit growth. In a nutshell he says throw out the idea of raising or lowering rates and instead put the emphasis somewhere else entirely.

If you’d like to hear Fleckenstein’s thesis for the way our government should manage capital please watch the video.


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Trader disclosure: On Oct.29 2008, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Adami Owns (AGU), (BTU), (C), (GS), (INTC), (MSFT), (NUE); Macke Owns (MSFT), (WMT), (MCD), (SDS), (UUP); Najarian Owns (BNI) Put Spread; Najarian Owns (INTC) And Is Short (INTC) Calls; Najarian Owns (MS) And Is Short (MS) Calls; Najarian Owns (PBR); Najarian Owns (MSFT) And Is Short (MSFT) Calls; Seymour Owns (AAPL), (BAC), (F), (MER)

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