It’s not a 100% closed case that we will have a depression, but policymakers tend to be reactive rather than proactive, Ed Harrison said during today’s Real Vision Daily Briefing. 

The financial panic was stopped out in the immediate by the Fed taking the private sector onto its balance sheet, but the real economy will kick in on the backside. Harrison said he is looking at leverage ratios and companies that are paying out high ratios of their dividends for a sense of where things are going, and argued that the Fed banning dividend payouts would be a proactive step to avert more financial disaster – but said it’s a move they are unlikely to make.

In the meantime, the Fed’s action to stop the liquidation phase has helped the S&P bounce back 22.8% since the low on March 23. Harrison said this is because we’re in a hopeful phase, and warned that it resembles typical bear market activity where there are massive swings to the upside and people get sucked into the rally, only to have the bottom fall out when the news comes in.

Harrison also discussed liquidity in the high yield market and expressed concern that should massive companies like General Electric (GE) or AT&T (T) become fallen angels, the market simply won’t be able to absorb issuers that large.

“Not only is there no liquidity because none of the investment grade buyers are buying, there’s also the problem of junk not being able to absorb sheer mass of debt being dumped onto that market,” he said.

Harrison said that ETFs create an illusion of liquidity and simplicity that doesn’t exist, and that he is looking for liquidity spreads between BB and B, and between BB and CCC as a reflection of how much liquidity is in the market.

“Can these guys go to market and can they roll over their debt?” he said. “That will be a sign of whether the Fed drawing the line in the sand at the ETF/fallen angel level is going to work in terms of liquidity in the high yield market.”