Mad World / When Rules Break Down

It had been unthinkable to change interest rates off the schedule.

The world's gone mad. All the rules governing policy have been broken. Fear of mass bankruptcies and recession have pushed central bankers the world over to lower interest rates in tandem, in jerks, off schedule, sharply and fast.

It had been unthinkable to change interest rates off the schedule: That would deliver a message of panic, people said. One waits for month-end and makes the announcement coolly. That's how it's done.

But September 15, the day Lehman Bros fell, the rules did too. The financial tempest caused central bankers to change tack: Leaving inflation aside, they set out to avert recession.

The Fed cut its rate by 1%, the Bank of England by 1.5%, the European Central Bank by 0.5% and even the Japanese, who love stability, lowered their rate by 0.5%, to 0.3%.

Stanley Fischer, a man in tune with the world economy, realized he couldn't stand alone. So he cut the Israeli rates by 0.5%, to 3%, the same as the British rate, hoping to stimulate the economy, making credit cheaper for companies and inducing the banks to lend.

I recently asked Fischer if he believes that rate cuts can work, given the banks' fear of insolvencies and resultant tightened fists. Thinking about it, Fischer answered that if interest didn't matter, he could raise the rate without anything happening. But then, credit would be even harder to get and economic activity would pause, so it was clear that the rate had to drop. It does work. Now it will be less risky for the banks to lend.