By Martin Wolf

Whatever else it may be, the Federal Reserve is not boring. Indeed, by the standards of other central banks, it is hyperactive. The shock 0.75 percentage point reduction in the Federal Funds rate of interest last week, particularly if followed by the widely expected 0.5 percentage points on Wednesday, is a dramatic example. The Fed is the exemplar of an activist central bank. But US fiscal authorities are not far behind, as the $150bn (just over 1 per cent of gross domestic product) fiscal package going through Congress demonstrates.

So what are the US monetary and fiscal authorities trying to do? Will it work? What are the risks? Should others follow suit? The urgency of these questions was made clear at the annual meetings of the World Economic Forum in Davos last week. The consensus was gloomy. Comfortingly, the Davos consensus is usually wrong. The Fed is certainly trying to prove it so this time.

The answer to the first question is: apply “risk management”. That approach is associated with Alan Greenspan, the former Fed chairman. But it is also central to the thinking of the Fed under Ben Bernanke.

The remainder of this column can be read here. Debate from our panel of economists appears below.

By Stephen Cecchetti

Tuesday morning’s sudden interest rate cut by the Federal Reserve’s Open Market Committee came as a shock even to those of us who live and breathe this sort of thing. The 75 basis point reduction to 3.5 per cent in the committee’s target for the overnight interbank lending rate was the largest single day move since the Fed adopted its current procedures in 1982. Not only was the action unprecedented in size, it was taken following a quickly organised conference call during the evening of a national holiday.

The immediacy of the cut has its genesis in both the deterioration of macroeconomic conditions over the week ending last Friday, combined with the equity market collapse, and the possible desire of chairman Ben Bernanke and his colleagues to change the committee’s modus operandi.

Up until this week, all of the Fed’s actions – both the more and less conventional – have been directed at keeping debt markets working. Starting with Mr Bernanke’s speech on January 10, 2008 it is clear that policymakers felt they had failed to keep the financial crisis from influencing the real economy. With global stock markets in freefall the need for immediate action became apparent. The Fed was planning to cut rates in 10 days anyway so why not bring the action forward to soothe markets and avoid a meltdown? While the inter-meeting action does not signal an emergency, it does confirm the plan for a dramatic easing.

The remainder of this column can be read here. Debate from our panel of economists appears below.

By Martin Wolf

“I was gradually coming to believe that the US economy’s greatest strength was its resiliency – its ability to absorb disruptions and recover, often in ways and at a pace you’d never be able to predict, much less dictate.” Alan Greenspan, ‘The Age of Turbulence’.

We all hope that Mr Greenspan proves right about the US economy. The Federal Reserve’s rate cut on Tuesday will succeed if Mr Greenspan’s view is correct. Yet many fear he is wrong. Many, too, blame him for the current mess. So how did the world economy fall into its predicament?

One view is that this crisis is a product of a fundamentally defective financial system. An email I received this week laid out the charge: the crisis, it asserted, is the product of “greedy, immoral, solely self-interested and self-delusional decisions made throughout the 2000s, and earlier, by very real human beings at the very top of the financial food chain”.

The remainder of this column can be read here. Debate from our panel of economists appears below.

By Tito Boeri

European unemployment has fallen to a level not seen for more than 25 years. Long-term unemployment has been declining even more: Europe is no longer a place where half of all job-seekers have been on the dole for more than 12 months, as in the mid-1990s.

The disappearance of mass unemployment is not the result of a shrinking pool of labour; in fact the average employment rate in the European Union has increased by more than 6 per cent in 10 years. This is the only area in which Europe is approaching the ambitious economic targets set at the Lisbon summit in 2000.

These developments are the result of reforms that have reduced employment protection and increased the rewards attached to participating in the labour market. Larger immigration to countries with the biggest regional unemployment differentials, Italy and Spain, has also been important. It has contributed to remarkable wage moderation in Europe, by preventing the overheating of local labour markets where there is a shortage of native workers. Governments, however, are not capitalising on these successes.

The remainder of this column can be read here. Debate from our panel of economists appears below.

By Lawrence Summers

The odds of a 2008 US recession have surely increased after a very poor employment report, growing evidence of weak holiday spending, further increases in oil prices, more dismal housing data and further writedowns in the financial sector. Six weeks ago my judgment in this newspaper that recession was likely seemed extreme; it is now conventional opinion and many fear that there will be a serious recession. Markets now predict the Federal Reserve will provide further stimulus to the economy by cutting rates by an additional 125 basis points on top of the 100 basis points they have already been cut so that rates fall to the 3 per cent range.

There is now a compelling case for the president and Congress to create a programme of fiscal stimulus to the US economy that could be signed into law in the next several months.

Given the market’s prediction of Fed policy actions, the debate now is not about whether or not to provide macro­economic stimulus. That question appears to be settled. The question is whether it is better for all the stimulus to come from discretionary monetary policy or for some of the stimulus to come from discretionary fiscal policy. A diversified policy approach seems clearly preferable in that (i) in a world where judging the impact of policy measures is difficult, the outcome is less uncertain with a diversified mix of stimulus measures; (ii) the proximate impact of fiscal policies is felt by the families bearing the brunt of recession, in contrast to monetary policies whose immediate impact is on financial institutions; (iii) use of fiscal policy reduces the amount by which interest rates have to be reduced, thereby reducing downward pressure on the dollar, which in turn contributes to upward pressure on US inflation and international instability; (iv) partial reliance on fiscal policy mitigates the various risks of bubble creation associated with excessively low interest rates.

The remainder of this column can be read here. Debate from our guest economists appears below.