Quote from budcampbell:
"I would conclude that correctly analyzing Fed moves is much more important than stock picking".............. Markets have become nothing more than an appendage of Fed policy. Orwellian.
Did loose monetary policy or lax regulation contribute to the financial crisis?
"Although monetary policy was unusually loose in the run-up to the crisis, according to our model this was appropriate given the shared institutional responsibilities for financial stability. But what did other regulators of the US financial system do to contain the housing boom and mortgage lending excesses between 2002 and 2007?
"Figure 2 provides a picture of the evolution of the policy rate, the US mortgage market, and regulatory policies on the mortgage market from 2000 to 2007. Broadly speaking, this evidence shows that, after the Fed started to tighten its monetary-policy stance and the prime segment of the mortgage market promptly turned around, the subprime segment of the mortgage market continued to boom, with increased perceived risk of loans portfolios and declining lending standards. Despite this evidence, the first regulatory action to rein in those financial excesses was undertaken only in late 2006, after almost two years of steady increases in the federal funds rate.
<img src="http://www.voxeu.org/sites/default/files/image/FromApr2012/rebucci%20fig2%2010%20apr.png">
"As a matter of fact, the share of non-prime mortgage over total mortgage originations went from about 20% in 2001 to more than 50% in 2006 (Panel a), experiencing the largest increase in 2004, while the Fed was already tightening its monetary policy stance. A similar pattern emerges in issuance of mortgage-backed securities (MBS), whose share sharply increased in the 2003-06 period (Panel b). Moreover, the share of high-LTV ratio mortgages in the US spiked in 2005 (Panel c), two years after the beginning of monetary-policy tightening. Finally, while the level of perceived risk increased sharply starting in 2004, banks began to ease their lending standards in 2003 and did so even more in the 2004-05 period (Panel d).3
"Despite this evidence, US regulators did not take action until late 2006, almost two years after the Fed had started to tighten. On the contrary, for instance, the SEC proposed in 2004 a system of voluntary regulation under the Consolidated Supervised Entities program, allowing investment banks to hold less capital in reserve and increase leverage that might have contributed to fuelling the demand for mortgage-backed securities (the vertical line in our charts labelled SEC). When regulators finally decided to act, it was too late: in fact, it was not until September 2006 that regulators agreed on new guidelines (the vertical line labelled FDIC 1) aimed at tightening ânon-traditionalâ mortgage-lending practices. Even if it this measure may have served as a signal that regulatory policy was changing direction, it should be noted the new underwriting criteria did not apply to subprime loans, whose standards were discussed in a subsequent regulatory measure introduced in June 2007 (the vertical line labeled FDIC 2). By that time, more than 30 subprime lenders had already gone bankrupt and many more followed suit.
"In the context of our model and according to this evidence, regulatory rather than monetary-policy failures are largely to blame for the occurrence and the severity of the Great Recession. Only by assuming that the Fed was the sole institutional guardian of financial stability, or at least the main one, is it possible to contend that monetary policy is to blame for the 2007-09 financial crisis and the ensuing Great Recession."
http://www.voxeu.org/article/federal-reserve-breeding-next-financial-crisis
