From a Credit Suisse report on shadow banking:
This simple framework explains two apparent paradoxes. In Europe, the system cannot be stabilized over the long term without deep changes in the framework of fiscal oversight and mutual support (progress towards fiscal union), nor without politically difficult reforms that boost flexibility and competitiveness in the periphery. This means that the ECB (and the German government) should not, indeed must not, provide unconditional support (firewalls) until these changes have progressed further.
But it also helps explain why – even with growth conditions improving and some signs of life in private credit demand emerging, the Federal Reserve seems to be itching to do more – or at least to make clear its willingness to do more should growth falter or new threats to recovery emerge. That in turn makes perfect sense given that the stock of liquid private collateral – the source material of “shadow money” – still isn’t growing. That’s consistent with an economy operating well below its capacity. It is the modern monetary counterpart of large output gaps. [emphasis mine]
Why does this need to be paradoxical? Maybe ALL central banks ought to provide unconditional support. I used to be of the “no pain no gain” school of Puritanical economics but I think we have to throw off our notion that suffering is the path to salvation. People are dying today. This isn’t completely black and white but I am beginning to find the present to be ever-compelling.