To: skinowski who wrote (88279 ) 10/31/2007 11:04:53 PM From: GST Read Replies (1) | Respond to Think "risk premium". When markets misprice risk, there is bound to be trouble. In the dotcom days, the highly risky proposition of future tech earnings growth was not priced into the market -- and when the risk got priced in the market for risky securities crashed -- in many cases by over 90%. The same has been true of risky debt obligations -- risk has not been priced in to them and they are getting hit in much the same fashion. Adding liquidity to the market is like giving a man an additive pain killer when his health problem is really that he has badly broken bones - it feels good, solves nothing and creates a new and very dangerous side-effect in the form of drug dependence. But honestly, at this point, all the Fed can do is hand out pain killers. There is no Fed solution -- only things to temporarily mask the underlying issue -- and the underlying issue is that a huge swath of securities are being completely wiped out because there is no market for them at today's prices and many are worthless while many, many more are simply not priced to account for default risk. This is all econ 101.
