Transcripts of the monetary policymaking body of the Federal Reserve from 2002–2008.

It’s a tough question, and I’ll try to take it in turn, which is that most of the liquidity phenomenon that I describe here and that we see in the U.S. markets, we describe in the FOMC as a U.S. phenomenon, but it’s really a global phenomenon. So as we think about what this liquidity tells us about interest rates, it’s hard to draw a certain conclusion. That is, these markets are increasingly global. The U.S. multinational financial companies that are successful in having access to capital in worldwide markets can take companies public in worldwide markets. So even if you believe that the Fed was too loose or overly accommodative, we’re somewhat limited in what we can do to stem that worldwide liquidity for the reasons that you mentioned.

When I talk about liquidity, moreover, I’m suggesting partly the first explanation that you gave, which is that there is access to capital, which has been described around this table as free money, by more people in more investments that might not otherwise be satisfying a strict return on investment or return on equity basis. So we’re seeing not only smart capital from folks with long track records who have entered this market and can deploy their investment dollars but also folks with less experience who can finance themselves particularly in the debt markets in a way that was unimaginable in previous cycles. So I think liquidity really means a couple of the things you’ve noted. Obviously, I, like you, think that these monetary aggregates are not providing us with much insight. Moreover, regarding your initial point, we would have a hard time drying up this liquidity, if that’s what we attempted to do, given the global nature of the sources and the uses of funds.

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