A parable about the economic crises

I had another one of those interesting chats with my brother yesterday. Everyday they get a report from their economics division called the Blast (boy is that well named). Yesterday one of the things they reported on was the expansion of liquidity (money) that has occured as governments move in coordinated fashion to try and pump liquidity into the frozen credit markets. He said the exansion of available capital is off the charts. At that point I expressed some concern - since the problem we are suffering started with a twenty year binge on easy money, doesn't making more of the stuff available potentially make things worse? Yes, was the response. If we don't anticipate when the market turns around it could produce ferocious inflation, and that reminded me of an event that occured at my friend David's cottage a few years ago:

One day Frank, David and Scott decided to have a fire. Not only would the fire burn off some recently cleared brush but Frank's kids could use it productively when it burned down a bit to make smores. Everyone was stoked.

The wood was stacked and ready to go. At that point Frank (Greenspan), decided that the fire could use some help getting going and he poured a bottle of bbq lighter fluid (accerlant - cheap money) on to the wood. There was no need to worry about anyone getting burned because it would soak in and burn off in an orderly fashion. No sign of irrational exuberance yet.

Some time later, Scott (China, Japan, etc.) decided the fire might start quicker with a little gasoline, so he emptied a jug of gasoline on to the wood. No need to worry that anyone would get hurt, it would be a quick infusion of accelerant and a roaring fire in no time. All this acclerant caused the fire to erupt (market melt down), and it burned higher and harder than any one expected. It was out of control.

Along came David (Bernanke, Paulson). He was going to bring the fire back under control in an orderly manner. Armed with a garden hose 20 feet too short, and with very little pressue he gamely tried to hose the beast down.

The fire was now burning so fast that it looked like it was going to consume all the wood in no time at all. That wouldn't do becuase Frank's kids wouldn't get their smores. What to do? Maybe add some big logs to the fire to keep it burning, but logs that wouldn't be consumed too quickly (the bailout).

Still the fire burned harder and faster than anyone had ever seen. At this point Frank decided the only solution might be more liquidity - he ran to the shed for more gasoline. He reassured a nervous Scott and David that this would only be used if the fire started to burn out too quickly, and just to keep the fire going.

Now they were standing around a roaring fire with cans of gas wondering when to add it to the blaze.

And that is where we are at now.