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[Sep. 30th, 2008|05:33 pm] |
1. The Fed will keep pumping money into the banks;
2. For a while, the banks will be reluctant to lend the money, because of risk uncertainty.
3. Then, the banks will decide that the risks are manageable.
4. And they will flood the economy with cheap money.
5. The question: How will the Fed be able to remove the excess of money?
a) by selling bonds. hm. but why would banks buy the bonds if commercial paper were to offer a better rate?
b) by raising interest rates. but if the economy is in recession it, the fed action, will make the situation even worse.
Therefore, step 5 has to happen between steps 2 and 3. Otherwise we'll have a runaway inflation.
It could be that the so-called bailout, if it comes between steps 1 and 3, would allow the Fed to control the (money pump)-to-(market fear) ratio. But to succeed they would have to walk a very tight rope.
My bet would be that they'd rather err on the side of inflation, rather than recession.
In the meantime, we've lost at least a year's worth of investment into the real economy. This means the recession/stagnation, in real terms, will last another year or two.
Am I missing something? |
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