2007-12-14nakedcapitalism.com

Both Magnus and Roubini acknowledge that more liberal application of monetary stimulus is unlikely to drive funds to the parts of the market that are frozen, yet they still call for interest rate reductions.

I can only hazard a guess as to what is at work. Some of it is that central bankers have very few tools at their disposal. The best remedies are probably regulatory changes, but those take time to implement, and the situation is devolving rapidly, or at least so it seems.

But I think there is a deeper issue at work. Too many observers want to believe that there is a solution. My sense is the best we have is palliatives. We can either take the losses, as the US has repeatedly told third world countries in similar fixes to ours, or we can go the Japan route of socializing the cost of propping up bad businesses and deals, or we can expand the money supply considerably and let inflation eat away at the value of the debt overhang. These are at least choices, but I don't see anyone (meaning any policy maker) discussing them explicitly. Instead, we are getting ad hoc pieces of each, depending who is screaming loudest at whom at the moment.

...

Faith in the Fed's power, at least in intervening in markets, seems very much misplaced. Oddly, it potentially has far more authority as a regulator, but thinking along those lines has fallen badly out of favor.



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