Thursday, March 20, 2008

A Solution of Sorts

Here is an intriguing pair of articles I ran across this morning. Jeff Frankel argues that the high prices of commodities like oil are being driven by low real interest rates. Anil Kashyap and Hyun Song Shin say that with oil prices so high, Middle Eastern sovereign wealth funds should come to the rescue of Wall Street.

Put together, they suggest a new piece of the monetary transmission mechanism: The Fed's monetary expansion reduces interest rates, low interest rates drive up commodity prices, high commodity prices make OPEC rich, and finally OPEC uses its new wealth to recapitalize our struggling financial institutions.