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To: UnBelievable who wrote (64146)	2/2/2001 9:07:19 AM
From: Box-By-The-Riviera™	Read Replies (1) \| Respond to of 436258

msft rated buy target 74 15% growth got investment banking business? dailynews.yahoo.com

To: UnBelievable who wrote (64146)	2/2/2001 4:12:40 PM
From: Mark Adams	Respond to of 436258

The cost of capital is a function of time and risk. Well- yes in an ideal world. But the practice of securtization temporarily depressed the cost of capital. As a result, a number of banks now hold portions of paper in large companies they don't 'know' under the typical know your customers mandate. But since they are 'diversified', they think their risk is lower. What happens when the price of a commodity is depressed? Demand goes up. Investments made based on that lower cost of capital fail to generate expected returns if the cost of capital rises. Defaults occur. Excess capacity. Uncertainty concerning the cost of capital, or conversely the lenders real rate of return increases the cost of capital. Agreed The higher the cost of capital the less real long term capital formation will actually occur. This is a little harder to swallow. The higher cost of capital should encourage more people to postpone consumption in the favor of savings, as the real return has gone up. Yet from the other side, the higher cost should reduce demand. Neither explains the situation in japan, unless you accept deflation there has pushed the cost of capital to high real rates despite near zero nominal rates. Real capital formation is one of the primary ways in which an economy can improve its growth and productivity, and ultimately the real wealth of its citizens. And in fact ensuring the long term stability of the currency and thereby helping to minimize the long term cost of capital is the raison de' etre of the central bank. This is brilliant. I hadn't considered this as the function of a good central bank, but I agree. You can be forgiven for not knowing this because it seems that while there might have been a time when the current chairman of the US Federal Reserve was taught this he clearly did not understand it or has forgotten. Well, I don't know this to be true. Unofficially, I stepped up in support of the Fed, since nearly everyone on SI thinks he's totally *ucked the US if not the global economy. BTW - It doesn't matter if what I say sounds intelligent to you or not. Nor have you explained the way in which excess liquidity not going to be inflationary in the short or long term because it is going to be absorbed somehow by the debt market. I'll give you a concrete example of how liquidity could be used in a non inflationary, non asset price driving way. Lets say the fed puts 1 billion dollars of additional reserves into the market on Monday. On Tuesday, Bank A uses those 1 billion in reserver to make a 100 billion loan to Company C. On Weds, Company C defaults, declaring bankruptcy. There is nothing left to cover the credit facility after paying the prior claims. Bank A takes a 1 or 100 billion dollar hit to equity? Stock holders, thinking they were happy with a growing financial institution, with a share price exceeding $10, suddenly find their shares trading at $2 wiping out a trillion dollars in market cap. The added reserves in effect monetized the capital of the bank. It took some time for this monetization to be reflected in the wealth of the ultimate bagholders. Who may turn out to be taxpayers. And the cycle ended up being very deflationary.