What did the Fed say or do to cause the deleveraging?

Discussion in 'Economics' started by thriftybob, Sep 18, 2010.

  1. Oil went to $140

    Goldman came out with a $200 number

    Gas prices were going to the moon

    And then the deleveraging began...... And the crash.....

    I assume the Fed said or did something in reaction to what was perceived as the beginnings of hyperinflation. But I don't recall them saying or doing anything. DOES ANYONE KNOW? OR HAVE A GOOD IDEA?

    To be honest, I think there is a good chance we will see that commodities zooming situation again in the next year. It might be demand from the rest of the world or a desire from the rest of the world to exit dollar positions that drives it, but I think it could happen again. Gold smells it now. So does silver. Oil not yet, but maybe it will in the spring when demand typically rises.

    And how will the Fed respond next time?

    I bet they are more careful not to cause a wanton deleveraging again, after seeing the deflationary impulse that resulted last time.

    I don't recall any overt Fed moves as per se, but yet all of a sudden all of the hedge funds were panicked out of EVERYTHING!

    Why did the banks all pull the credit lines all of a sudden? Or better yet, what in the hell were they doing lending to hedge funds at all in the first place, with 20 or 30 to 1 leverage?

    Odd... Why don't we read these kinds of discussions in the Fed meeting minutes?
  2. Did you just wake up from a coma or is this a joke?
  3. Must be a joke, surely...
  4. the moneychangers can only survive in their surrogate states thru usury and bubble/bust.

  5. No, not a joke.

    Just trying to put together the overall sequence of events, and get them in perspective in order to see what "tells" there might have been.

    If you happen to know of a chronological summary of actions and events posted someplace, that would help a lot.
  6. The Fed causes overleverage, not deleverage.
    Deleverage comes when reality hits the system.
  7. Dont you hate those jack asses like startraitor & Martainghoul that dont know the answer and try to make you feel stupid for not knowing the answer too?

    Ok..I'll try to explain what happened. Asset prices came down and all these hedge funds/banks/ect that were invested in mortgage backed securities on very thin margins suddenly needed to get the debt off their balance sheets as prime brokers required a certain amount of collateral.

    So as these people are selling, asset prices are dropping even more which means they need to keep selling everything else they have which in turn means prices will keep dropping. As everyone is selling, and because they were on margin, it means that all these dollars suddenly just evaporated from the economy.

    The fed is then the only one who can stop the deleveraging by injecting the lost cash back into the economy by buying treasuries and corporate bonds.

    So then all that margin that banks and hedge funds were paying interest on, suddenly got transfered to the taxpayer when the fed started printing money to replace the lost dollars. (but thats another story)
  8. The sequence of events are outlined in this book.

    My basic understanding is world banks put two and two together and realized various institutions were borrowing money to repay other loans (on a very large scale to show up on their radar). Rather simple.

    When time came for new loans, world banks lent less or required more collateral. The collateral offered were various derivative which when price to sell proved to worth much less than what was on the books.

  9. Kubinec


    Good thread.

    Though I've read a lot on the crisis, I was always left with a lingering question.

    The root of this crisis was the low interest rate and lack of proper regulation on the big money.

    The shit hit the fan when the fed incrementally but quite suddenly raises the interest rate to 6% in a short period of time, causing those millions of people with Adjustable Rate Ms to default, etc, etc, and every other problem spiraling out from then on.

    So, looking back, it seems that this crisis could've been avoided had the Fed extended the period of time during which it raises the rate, or never raises it that high at all, and if there were proper regulations in place to avoid the big money messing up.

    In other words, lack of proper regulation + ease of borrowing capital = our economy catches a cold. Add in globalization to that formula, and the whole world gets sick along with America.
  10. I sincerely doubt the crisis could have been "avoided" considering the 2001-02 crisis WAS avoided, in some sense of the word, from spiraling into a persistent recession/depression thru the leveraging of the real estate sector. The more honest response is that 2008 occurred primarily because it didn't occur 5-6 years earlier and that the rate of credit creation, leveraging could not persist any longer.

    To sum it up, the "cause" that the OP is looking for could be pinpointed to Fed action's, namely raising rates and perhaps (though not 100% sure on this, less POMO support during that 6-12 month period). It was definitely an attempt to slow the leveraging of financial assets and perhaps it was thought at the time that they could manage the fallout.

    Of course, that is even quite debatable. It definitely depends upon your opinion of the role of the Fed in managing the economy vs. their role in actively creating boom and bust cycles.
    #10     Sep 18, 2010