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Moral Hazard? Yes. Weimar? Not yet.

August 15, 2007

Tags U.S. HistoryInterventionism

A little clarification of the confusion surrounding the recent massive central bank intervention in the markets might be in order.

Yes, multi-billion cash injections have been taking place: no, this does not mean a return to the 1920s — not yet, anyway — since the bulk of these extra funds have already been withdrawn in the subsequent money operations undertaken as the original loans (strictly, repurchase agreements) have expired.

Of course, the CBs now face the nice problem of weaning a (rightly) fearful and vastly overstretched market off the dripfeed on a more permanent basis and, granted, this has greatly reduced the possibility of a more restrictive policy being implemented in the near future, but that is still not to say that we can take the sum of announced liquidity injections and immediately construct some scary multiple of new M2 or M3 which will be the enduring result of their recent actions.

They are therefore attempting to stop a bank run (strictly, a NON-bank run) at present, not running the printing presses in any sustained fashion.

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