Buzz & Banter
Tony makes a spot-on observation about the benefits of what the Fed is doing in the near term: "Maybe the liquidity that hasn't appeared to have worked has caused stability of some kind that would allow enough time for the economic 'bubble' excesses to be slowly unwound and set the stage for more sustainable economic growth." That's precisely what the Fed is hoping for, and I agree with Tony that it is in fact what has probably happened. Without this liquidity, the economic situation would probably be far worse than it current is.
Re-liquifying the financial markets may create a large enough time window for the economic transition from consumer-led growth to corporate-led growth to take place. Sincerely, we should all hope it works.
But here is my long term problem with such short term fixes: knowingly making such a bet, when the data suggests that such liquidity is having decreasing returns (almost exactly like GM and Ford's sales haven't responded as well to increasing sales incentives), creates limited near term rewards while creating significant, possibly disastrous, long term risks. Never in the history of the Federal Reserve, in my exceedingly humble opinion, have such near-term rewards been traded for such long term risks.
That is what I meant by the eggs and ham breakfast analogy. The chicken can lay as many eggs as he wants, but it's the ham that pays the dearest price for our meal.
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