Wednesday, October 22, 2014

The Fed Crutch

When the good times never stay
And the cheap thrills always seem to fade away
When will we fall?
When will we fall down?
--Toad the Wet Sprocket

Read this piece to gain a sense of the moral hazard created by Fed policies. Increasingly, market participants think that the Fed has their backs in the event of price declines. This causes market participants to take more risk than they would in 'uninsured' markets.

The author suggests that the "emergency is over" and Fed policies to backstop investors are no longer necessary. If the Fed does not withdraw these policies, "markets will never stand on their own feet again."

Because markets have been leaning on the Fed crutch for years, taking the crutch away will likely cause markets to fall a few times before they learn to stand on their own.

1 comment:

dgeorge12358 said...

The real truth of the matter is,as you and I know, that a financial element in the large centers has owned the government ever since the days of Andrew Jackson.
~Franklin D. Roosevelt (in a letter to Colonel House, dated November 21, 1933)