It has now become obvious to me the path of the Fed. No, Mr. Bernanke is not going to be tough on markets. He is not going to give the medicine that is needed. He has chosen his path, the seeds of which were planted in his November 2002 speech about monetization (dropping dollars from helicopters).

The Fed today injected $65 bln of repos, extending credit to banks to shore up their liquidity needs. Normally the Fed only accepts treasuries as collateral. But the banks no longer have enough treasuries, or they don't want to sell their "safe" assets in exchange for credit. But they do have lots of risky assets like CDOs that everyone wants to get rid of. The Fed bent over and today announced they will take those "off their hands".

This is the monetization Mr. Bernanke referred to. He is talking tough in his rhetoric about inflation and keeping interest rates stable. I think he may stick to that. But out of the other side of his mouth he has decided to be even more aggressive by issuing credit to banks and buying risky assets for their balance sheet.

Mr. Bernanke thinks he can control markets. To be truly successful he must be willing to buy vast amounts of things like stocks and junk bonds in order to get the "liquidity" he wants into the markets.

This is alchemy finance in its truest form. All it will do is stave off the inevitable and make it worse when it happens.