"Fixing" (breaking) the "non-functioning" (functioning) Markets
St. Louis Federal Reserve President William Poole, previously more of an inflation hawk in the Fed, has flipped into a bailout apologist with his whitewash paper today, "Market Bailouts and the Fed Put" (11/30/07).
Calculated Risk commenters did a good job of exposing the flaws in Poole's whitewash.
The root absurdity of the Fed's claim that its interventions are fixing a non-functioning credit market is (like most allegations of market failure) most easily illustrated by an eBay auction:
- Seller lists item.
- No one bids.
- Auction ends without a sale.
Sometimes the correct action is no sale.
Functioning free markets do not guarantee churning commissions.
Functioning free markets do not guarantee any particular level of trading activity.
The markets were working fine in August 2007 by spiking the overnight inter-bank lending rate to 6% in response to the latest information of overlooked risk in overpriced housing assets/securities.
Of course, a price-fixing (interest-rate setting) central bank is anathema to a free market, so Fed hostility to a properly functioning free market is unsurprising.