The Fed Fuels Overcapacity

Merrill's Bernstein similarly worried about the "whopping expectations built in" to current equity valuations. "We're in a speculative environment and the Fed has added fuel to the fire," he said, calling their policies "counterproductive."

The Chairman's Advocate

To be sure, not everyone sees peril in the Fed's policies.

Ayaz ul Haque, director of DFJ ePlanet Ventures, a $650 million investment arm of Redwood City, Calif-based Draper Fisher Jurvetson, noted that private companies running low on cash are "finding it relatively easier to arrange bridge financing, which tides them over until subsequent rounds of funding," or a public offering, if/when that market revives. "Lower interest rates are assisting them in doing that on relatively better terms," Haque said.

John Lonski, senior economist at Moody's, agreed there is a "negative feedback" of monetary stimulus -- specifically, "extending a lifeline to ailing companies in industries suffering from excess capacity."

But "I don't think this unwanted feedback provides reasons for the Fed to stop cutting rates," he said. "On balance, they're still having the effect of stimulating expenditures."

Rather than the Fed, the policies of the Justice Department and Federal Trade Commission might be bigger impediments to industry consolidation, the economist suggested. Those regulators have judged merits of proposed mergers largely on the impact on consumer prices, which is not their mandate, Lonski suggested. "[Their] decisions have run counter to Fed efforts to minimize price deflation."

Furthermore, the improved equity market resulting from monetary and fiscal stimulus "ought to eventually aid the process of mergers and acquisitions," he continued. Higher stock prices will "give the strong more incentive [and currency] to take over the weak, and pursue consolidation in a manner more orderly for the economy and society than outright bankruptcy."

Maybe the love/hate triangle involving J.D. Edwards (JDEC Quote - Cramer on JDEC - Stock Picks), PeopleSoft (PSFT Quote - Cramer on PSFT - Stock Picks), and Oracle (ORCL Quote - Cramer on ORCL - Stock Picks) will prove a harbinger. But anecdotal evidence suggests otherwise.

After announcing their respective quarterly results, Morgan Stanley dampened hopes for a rebound in M&A activity and Goldman Sachs cautioned there was only minor improvements in its investment banking backlog.

Finally, Silicon Valley legend Sanford Robertson, currently a partner at Francisco Partners, said his leveraged buyout firm "can't buy public companies" because corporate directors want 50% premiums over current stock prices.

No doubt one reason directors are holding out is because the Fed has helped keep hope alive, even in places where it arguably shouldn't be. That may be a "good" thing for short-term traders, but it also threatens to undermine the longer-term recovery and prolong the post-bubble hangover.