enigma, I think we are mixing two events that were closely spaced in time (LTCM debacle and the drying of liquidity in the bond market). In the first case, LTCM's restructuring, the FED acted as a midwife, and the owners of LTCM took a 90% hair cut, not any bail out in my book. Furthermore, many of their lenders put up equity money, now at risk to avoid immediate liquidation in illiquid markets. The second event, the October 15 easing, was, IMHO, a masterful timing event by the FED's to counter the residual lack of liquidity and near panic conditions. Once again, the FED moved against the wind to balance out catastrophic movements in the markets. Of course, perennial bears did not like it since they expected a major melt down, instead all we had was a minimelt which is now being "absorbed" in an orderly fashion. The fact of the matter is that under normal yardsticks, the FED's policy is still restrictive, and that, coupled with a fiscal restrictive stance (budget surpluses are fiscally restrictive in that the government pulls out more money from the economy than it puts in) could still bring on a recession. No one wins from a recession, so the FED is absolutely right in reducing its restrictive stance and easing a bit. The beauty is that the market perceive the FED'a action as extreme easing, while in fact it is still tight. This will leave the FED ample room to really ease the next time the financial markets get shaken (Brazil? Canada? any other group of countries relying heavily on commodity trade?). The net result, is isolation of our own economy from the deflationary pressures from a world awash in excess capacity.
You really think it would be better for the FED to let our economy going into a tail spin? Without consumer confidence in the US, there a "clear and present danger" of reduction in domestic aggregate demand, and thus a major cycle of economic contraction, why would that be in anyone's interest (but the bears) to allow such a situation to develop?
Zeev |
