Fed Acts to Stem Credit Turmoil

Quote from AAAintheBeltway:

They should have cut rates Tuesday. Instead they retained idiotic language about an inflation bias. We are now seeing a worldwide vote of no confidence in the Fed and Bernanke, a vote that is richly deserved.

Someone needs to wake Bernanke up and tell him it's not the 1950's. Markets are interlinked and move at digital speed. Illegal immigrants walking away from no doc loans in California quickly morphs into a crisis for european banks. The Fed can't move at the leisurely academic pace Bernanke seems accustomed to. They need to do something dramatic and do it quickly.
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Exactly AAA.

Now there's 3 of us - you, me and Cramer. Everyone else
has jumped aboard the Bernanke inflation trainwreck - which is a gigantic nonthreat compared to the levered US credit markets effectively going cash only.

The effect of Bernanke's failure to take dramatic INTEREST RATE ACTION amidst a credit crash is the same as a RATE HIKE. What is the best measure of how much the hike this week was? Very simple answer and it came from Wells Fargo - it was 125BP - the amount they jacked their jumbo loans. The public instinctively understands this - the jumbo loan story is the most emailed article in the NYT business section.

I don't know how thay get by this mess now - maybe cut 100 in 2 meetings and quietly drop bank reserve ratios and see if they'll lend.
 
Quote from Trader5287:

Exactly AAA.

Now there's 3 of us - you, me and Cramer. Everyone else
has jumped aboard the Bernanke inflation trainwreck - which is a gigantic nonthreat compared to the levered US credit markets effectively going cash only.

The effect of Bernanke's failure to take dramatic INTEREST RATE ACTION amidst a credit crash is the same as a RATE HIKE. What is the best measure of how much the hike this week was? Very simple answer and it came from Wells Fargo - it was 125BP - the amount they jacked their jumbo loans. The public instinctively understands this - the jumbo loan story is the most emailed article in the NYT business section.

I don't know how thay get by this mess now - maybe cut 100 in 2 meetings and quietly drop bank reserve ratios and see if they'll lend.
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Something tells me that 3 of you are desperate longs ignoring facts.

Rate rises must ve been done a long time ago and economy reacts now by demanding rate rise
that's why Fed fund rate was 6%
Credit market doesn't go cash only. It demands 6% rate now. And I don't know how Fed can ignore this. Probably rise 75 points rise in 2 or 3 meetings
 
Oh Lord. Selectively cherry-picking your facts doesn't make a case.
The only rates that spiked on Thursday and Friday were the shortest-term rates, and that only for the interbank market. This was strictly because, once BNP announced their troubles, all the banks began to pull back from the interbank market. That's a credit crunch.
The 10-year, meantime, is DOWN, from 5.25 on June 12 to 4.76 as of now. The 13-week dropped a quarter point last week. These are rates where the only risk that the buyers take into account is inflation. Obviously, they don't see any, and they're betting they don't see any with real money.
Which means, the Fed has room to lower rates. Because of their well-doc'ed inability to listen to what the markets are actually saying, a deafness that seems to be endemic on these boards as well, they can't whirl around and start cutting without confirming the suspicion that they're total asses.
Trichet, with that special news conference he called back on August 2 to make that announcement about "strong vigilance", thereby signalling a rate rise in Sept, already confirmed that if he had a brain he'd be an idiot, so he might as well cut. Everyone's laughing at him anyway.
 
Quote from trefoil:


The 10-year, meantime, is DOWN, from 5.25 on June 12 to 4.76 as of now. The 13-week dropped a quarter point last week. These are rates where the only risk that the buyers take into account is inflation.
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Why are you so sure? When Greenspan was rising rates it wan't so obvious for him. And I think you're wrong here too.
Tresuaries pricing are complex here and invloves a lot of variables
Have you thought that currently tresuaries are used by countries like Russia as a collateral against their own currency emssions. So rates might be a function of inflation in their own countries.
End point- you can't justify necessity for rate cut comparing it to tresuaries rates and especially at current extreme levels which will obviously recover to above 5 after situation stabilizes
 
People who press for rate cut don't relized there is no market for rate cut; NO ONE WILL BUY IF FED CUTS ITS RATE.

Why don't the people who ask for rate cut dive into the treasury and push the rate down? Show us your patriotic duty and save our economy going into recession.

Commodities prices must going down and productivities must keep in check with labor cost; then we can talk about rate cut. And frankly; i don't see this is happening soon.
 
Pointing to ten year rates is not helpful when US mortgage finance is within days or weeks of shutting down. Barron's has a rehash of the Coutrywide turmoil Thursday and Friday - the same applies to all the big lenders really - they had 1B on their books that they couldn't sell into the secondary market because there is no functioning market and no affordable credit insurance available. More people should listen to Mozilo.

What the writer didn't get is these loans were perhaps a day's production and when they are free of the loans they are committed to make - they will stop, unless something changes fast.

Amazingly, there is an easy solution that the Republicans blocked Friday night - reopen FNM FRE. These GSEs were instrumental in the last crash and they only later became corrupted - in the Clinton years. The reason is because they could lay off the risk the old fashioned way before all this ABS jive - in eurodollar markets - which is all that market ever was - US mortage rate risk.

The only solution is a rate cut - the member banks have to be screaming for it, or will be shortly. All that fed repo of MBS did last week was buy a few days.
 
The point of pointing at the 10 year was to show that inflation obviously isn't concerning the buyers of these instruments. Away from Treasuries, obviously, credit risk has gone up, so interest rates will respond by going up as well.
At no point have 10 years traded above Fed Funds since that rate went to 5.25. Saying that "normal" is above 5 is also, flatly, false. It has only been above 5 for a few months in the past 5 years. Normal is right where we are now, over that time frame.
That's the market telling you that inflation isn't a risk, because inflation risk is the principal risk for buyers of these instruments. Credit risk is nil; currency risk is also important if you're a foreign buyer, but that also means that the current price reflects a serene view of this risk as well.
That combined with this credit crunch should be more than enough to tell the Fed to lower. Just to get to a flat curve they'd have to drop half a point; to get to something remotely resembling normal they'd have to go to 4.5.
 
Solution is.
1. get rid of the fed an let the markets dictate the rate. this will also stop inflation because nobody would be able to just print money with a mouse click.
2. make sure that the dollar is backed by gold.
3. cut the federal income tax. then everyone will be able to afford health insurance and pay for college educations instead of the government.
VOTE FOR
RON PAUL 2008
 
yea right ....rate cut....

if the CDS market is too pricey...a rate cut wont do any good

where are the ratings agencies in all this??????

I think that Moody's and S&P hands have blood on them.....


if BBB- has no market then it's D paper at best........
 
Whether we like it not no person or country can ever spend its way out of bankruptcy. In simple terms look at any government like any business....the two key economic factors for business are profitibility, or forecast profibility, and cashflow.

USA Inc. has severe negative cashflow but its bank (the lenders China, Japan, and others) have had faith in the company and its ability to generate a profit one day. Plus they have been secure in the faith of the value of the assets of USA Inc.

However, over the last decade many of the economic generating assets of USA Inc. have been sold and moved overseas e.g. Made in China.

What USA Inc. use too sell in its day-to-day business they now buy from others. Never mind USA Inc. had other assets "houses" that had value.

One day when everybody realizes that USA Inc. is actually bankrupt they will stop lending to them....fortunately for USA Inc. it can increase revenue by increasing tax and cutting spending.

By 2017 USA Inc. will have introduced means testing for social security, eliminated the FICA cap (so all income is accessed), flat 30% marginal tax on ALL lincome, and eliminated all tax deductions.

http://en.wikipedia.org/wiki/United_States_public_debt

.....In 2006, Professor Laurence Kotlikoff argued the United States must eventually choose between "bankruptcy," raising taxes, or cutting payouts.

He assumes there will be an ever-growing payment obligations from Social Security, Medicare and Medicaid. Others who have attempted to bring this issue to the fore of America's attention range from Ross Perot in his 1992 Presidential bid, to Investment guru Robert Kiyosaki, and, most recently, David Walker, head of the Government Accountability Office.


p.s. So you don't believe that it happen in the good old US of A. I've lived in a first world country that did this back in the mid 1980's when they got into exactly the same situation where the US is today. Looks like I will get to experience it twice in my life time.
 
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