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Pastimes : Clown-Free Zone... sorry, no clowns allowed

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To: GraceZ who wrote (62733)	1/29/2001 4:38:23 PM
From: Mark Adams	Read Replies (2) of 436258

I agree with the observation that the ripples seem to be reinforcing each other, result in ever larger compensations. Not good for stability, the reported aim of the Fed. It would seem that if the demand for liquidity is high now, lower the fed funds rate further would likely further increase demand. I suspect from a historical view, we could say the fed increased rates to restrain an out of control situation until something broke. This allowed them to locate an area of greater fragility than the balance of the system. Then they lowered rates, striving for stability, long enough to get whatever broke cleaned up. (we are in this phase now, and don't know how long cleanup will take. may not know what broke.) Now a smart doctor, after cleaning up what broke during the first stress test, would stress test again, and repeat the cycle, until the excesses were weeded out. Edit: This high demand for liquidity could also be a sign that current income cannot finance the current debt load without constantly rolling over debt, which would be very bad.

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