The fed has already taken action by lowering the discount rate. We will see if further liquidity is provided in September with a lowering of the Fed Funds target.
Many are opposed to this on the grounds that we should let the markets ‘sort things out.’ Others think that we should maintain a focus on controlling inflation.
It was not unfettered markets that lead to these things ( see previous entries). At this point unfettered markets will call for a correction, which could be devastating to the economy. They could lead to a recession or at least massive losses in the financial and real estate sector.
Since this correction would be very much the consequence of Fed action,( once again the boom/bust result of discretionary monetary policy previously discussed) should the fed use their ‘discretion’ to help cover up their mistake? If they do will we not expect to see another bubble in some other sector in 5 more years? Or, regardless of inflation or expectations, are we experiencing a monetary contraction that calls for fed action to provide liquidity?
These are the questions we have to ask, and they illustrate the uncertainly and instability that we live with in the face of discretionary monetary policy.
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