Were YOU reading this on December 12, 2007?
Music geeks should also read and take note of the analogies to record labels below (bolding is mine):
What the Fed has just done - allying with other major central banks to inject liquidity into the banking system without regard for the underlying problems of adverse selection and moral hazard - is nothing short of economic madness.
It’s essentially letting the Street off the hook for a decade of malfeasance, transferring risk from the wealthy to the poor, and, ultimately, sowing the seeds of the destruction of the American - and perhaps global - financial engine.
Remember - it’s exactly this refusal to deal with basic financial malfeasance that ripped Japan’s economy to shreds; which put Japan into an economic purgatory that lasts to this day; one which resists all efforts to shake or break it - because the underlying problems of bad loans and worse DNA still haven’t been addressed. The risk and costs have just been swept under the carpet.
I’m not trying to be an alarmist, but the hammer of the macropocalypse is about to fall - the confluence of factors driving the global economic system to a point of irreversible crisis is almost too great to be believed.
Let me put it more simply: The Fed is treating this like it’s a liquidity crisis. But it’s not: the macropocalypse is a deeper problem. Liquidity is drying because the firm is rotting from the very core: the larger economic system is rife with adverse selection, moral hazard, and assorted other flavours of evil.
I pointed it out for media a long time ago (ie, my new econ of music paper). But it’s just as true for banks. So throwing liquidity at rotten institution is perverse because it destroys the incentives for reform.
Imagine if we threw money at record labels, in the hopes that they’d publish better music. What do you think would happen?
Unfortunately, that’s exactly what the Fed’s doing with the financial system. But throwing liquidity into a rotten system is just giving the virus new stuff to infect, consume, and decay.
