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I want to talk about this too. Here's a post I made in your BFI thread:
- People don't want to lend money because of possible defaults on what turned out to be bad loans.
- Interest rates go up.
- Central bank floods market with cheap cash.
- 4. ???
- 5. Profit!
Is the ??? step "people go back to making bad loans?"
I'll add to it by saying that maybe it would be a good thing if rates did tick up significantly. People are obviously realizing that cash was too cheap and are demanding higher rates. The central banks' rebuttal to this seems to be "no, you're all wrong, please to be continuing to make bad loans." The entire idea of a "right" price for money being set by a central authority is as ludicrous as the "right" price for wheat, oil, or toothpaste being set in the same manner.
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No the ??? step is they start making good loans that had dried up as part of the liquidity crunch they faced as the bad loans defaulted.
The statement in the OP is that this is some sort of "seismic shift". Its not, at least not yet. Its BAU. So far the injection of liquidity hasn't had the psychological effect desired, though, and as noted above, interest rate cuts are the likely next step. If that fails to stem the tide who knows.
Of course money supply up combined with Fed rates down, besides loosening the credit crunch, will raise inflation fears, so there is some offsetting effect. Depending on the markets assessment of the value of liquidity vs inflation risk will determine how well they react.
If Greenspan were still at the helm I think the market would respond much better.