James Hamilton writes,

Will [purchases of mortgage securities and other assets by the Fed] succeed if we just do it on a sufficiently large scale? I’m not at all convinced that it would. Our standard finance models treat interest rate spreads as governed primarily by fundamentals such as default risk and only secondarily by the volume of buyers or sellers.

Oh, please. “Our standard finance models” have absolutely nothing to say about crazy de-leveraging. If those models worked, we wouldn’t be where we are now.

If the Fed brings the parrot back to life, and mark-to-market accounting of mortgage-backed securities and other non-Treasury bonds starts making bank balance sheets look stronger rather than weaker, the de-leveraging process could be interrupted or even reversed.

There are worrisome excesses in the real economy–too many houses, too many shopping malls. But if the Fed has managed to pull the financial sector out of its de-leveraging death spiral, we can look forward to a finite recession, which would be a lot better than Great Depression II.