The Fed's pattern of providing ample liquidity resulted in the investor perception of put protection on asset prices. Investors increasingly believed that when things go bad, the Fed would step in and inject liquidity until the problem got better. Invariably, the Fed did so each time, and the perception became firmly embedded in asset pricing in the form of higher valuation, narrower credit spreads, and excess risk taking.
The decision by the Fed to lower short-term interest rates by 50 basis points (0.5 of one percent) on Oct. 08, 2008 could be interpreted as an instance of Bernanke following in Greenspan's footsteps, in this regard.
An anchor of confidence is undermined ; Political sniping in U.S. and Europe diminishes central banks as rescuers
Sep 22, 2011; FLOYD NORRIS International Herald Tribune 09-22-2011 An anchor of confidence is undermined ; Political sniping in U.S. and Europe...