EclectEcon

According to Felix Salmon and Tyler Cowen, it is possible that the US Fed is trying to create a whole bunch of liquidity because of all the uncertainty in the financial markets. From Tyler,

Let's say the new common knowledge is "this asset class isn't as liquid as we used to think." Ideally price should fall but how much? If selling is only scattered the market never learns the shape or exact location of the new demand curve. Furthermore the selling you observe only tells you "how good is the market at responding to this knowledge shock" and not "what was the initial liquidity downgrading in the first place." Convergence, today, appears to be problematic.

Felix Salmon adds,

If the problem is that there are too few fools in the market, it might make perfect sense for the Fed to step in as a fool of last resort. With any luck, once the Fed starts acting foolishly, other market participants will follow suit.

This description of what the Fed might be doing sounds similar to the old interventionist, Keynesian view that a proper role for monetary policy is to lean against the wind by doing things that increase aggregate demand when it is slipping or reduce aggregate demand when the economy is overheating.

The trouble with this role for the Fed is that it is terribly short-run and myopic. The Fed creates liquidity because markets don't clear? Markets don't clear???

That is highly questionable at best. What is happening is that people who are trying to sell financial assets are finding it hard to sell the assets at prices they would like to receive because of buyer uncertainty... that much sounds quite plausible. But the Fed policy isn't really leaning against the wind; rather, it is bailing out investors who took some risk and don't want to accept the consequences of that risk [in this case, the risk is that we might want our money and try to sell an asset into a very thin market, thus receiving a very low price relative to our original expectations].

I just don't see why this is a "good thing" for the Fed to do. It seems more reasonable to me to ask investors to accept the consequences of the risk they take on. Otherwise they have an incentive to take on even more risk in the future, with the expectation the Fed will bail them out. In addition, the extra liquidity could easily lead to additional inflationary pressures in the near future.

This doesn't sound like "leaning against the wind" to me. It sounds more like spitting into the wind.

Totally unwarranted digression: Speaking of saliva, can someone get high off it?