here's a good excerpt if you don't want to read all his details
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As an additional remark, as I noted in mid-October, “we're likely to observe a growing amount of what will wrongly be viewed as 'cash on the sidelines' and 'money creation' in the banking system. The problem is that the commercial paper market has dried up. If savers are not buying those securities as the proceeds come due, and a good portion of the borrowing is still somehow being rolled over, then it must be the case that the savers who used to own commercial paper are now saving in another form, and the borrowers who used to issue commercial paper are now borrowing in a different form. Most probably, banks will be the chosen intermediary, because savers view bank deposits as insured and somewhat safer than unsecured commercial debt.” This is a very predictable outcome, so be careful not to interpret, say, increases in M3 as being the result of “Fed liquidity.”
In short, the Fed is doing nothing more than predictably rolling over its repos, but with great flourish as if something more is going on. The fact is that current economic risks are not the result of a shortage in liquidity or confidence, but reflect a fundamental solvency problem among homeowners who borrowed more than they could afford, on the expectation that rising home prices would provide that affordability through “cash out” refinancing.
It may make people feel good that the Fed looks like it's doing something, but these actions are being misrepresented to investors as being far more than they actually are. Misinformation simply creates false hope, and directs attention away from real problems. This is a disservice to investors.
Over the years, the misperceptions of investors have tended to be a source of periodic frustration for us (the 1999-2000 tech bubble being a good example), but avoiding those misperceptions has also generally been a great source of long-term returns. I don't have any reason to believe that this instance will be much different.
