"The Fed is relying on its own clients' view that these assets are now being underpriced in the market, and that is the root of the problem — that they are still good credits that are being underpriced. That line of reasoning undermines the Fed's belief in free markets, because investors obviously disagree, or they wouldn't be underpriced."What is so funny is that the "quotee" seems to miss the very real thing that make markets work. If we live by the quote above then no one would ever buy in a down market. If the market for a particular asset is down, it "must" be underpriced and therefore not worth buying or investing in.
Time and time again, however, savvy investors see opportunity in underpriced assets and end up making a lot of money when others come to their senses and the value of the asset snaps back into line. Warren Buffet comes to mind here.
I don't see how the Fed's view that an asset used as collateral that is, for the moment, underpriced undermines their belief in a free market. If anything, it shows their strong belief in just the opposite.
