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

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

  1. If you recall, they raised rates 1/4 point at a time, many, many times, even though the economy basically sucked except homebuilding and associated housing/credit bubble.

    IMO, the mistake was creating the bubbles, not popping them...

    But, given all the nasty news late 07 into 08, why did commodities peak in June/July of 08? Then crash. Thats the one that I can't understand. CRB index dropped from high 400's to 100's in the deleveraging panic. I'm trying to figure out why that happened or what tells preceded it that I can see if it were to start again.
    #11     Sep 18, 2010
    #12     Sep 18, 2010
  3. while i understand little of what and how the 'financial crisis' occurred i don't believe
    the Fed to be directly responsible before or after the event, only another nail
    what i believe to have provided the foundation for it all was the -
    'Commodity Futures Modernization Act of 2000'
    see also http://en.wikipedia.org/wiki/Panic_of_1907
    and, describes some of the 'how' - not a useful title - google to download ppt:
    ''The Role of Information Failures in the Financial Meltdown''
    #13     Sep 18, 2010
  4. Firstly, my young friend peil, pls do me the courtesy of spelling my name here correctly (that's at the very least; I am not even asking you to be able to write "jackass" correctly). Secondly, I know exactly what happened, 'cause I was there, right in the middle of it (as I have mentioned in other threads). Finally, judging by your "explanation", you have absolutely no idea what you're talking about.

    As to the OP's question, the deleveraging that happened and is still happening had nothing to do with the Fed. There's a lot of ink spilled on the subject, so there's no need for me to go into detail. Barry Ritholtz's book is pretty good and there are a few others, such as "13 Bankers" by Johnson and Kwak.
    #14     Sep 19, 2010
  5. From my perch what I saw was long-term funding not being rolled over, forcing everyone to fund themselves short-term, which lasted for a while until even that wasn't available anymore once Bear Stearns and then Lehman (especially Lehman) went belly-up, and that of course made all the fun stuff that happened after that necessary.
    As Bagehot observed more than a hundred years ago, in a crisis, no one trusts anyone else, and that of course means the entire system seizes up.
    The root of it all was mortgages that should never have been made going bad, of course. The Fed was complicit in that to the extent of not adequately regulating banks' exposures, which is part of their job. Of course, the same could be said of all the other banking regulators, in the US and Europe, and the private credit rating agencies.
    As a point of info, I know there were plenty of these mortgages that were bought by the Chinese as well as part of the dollar assets they bought to keep their currency fixed. One wonders just how much they lost on that agency debt.
    #15     Sep 19, 2010
  6. JamesL


    5 1/4% - Fed Funds rates are what determines mortgages and other consumer related interest products, not discount rate.

    #16     Sep 19, 2010
  7. Actually, no.
    The 10 year bond is what a 30 year fixed will be priced off of, as most people will own their homes for about that time on average.
    ARMs will get priced off other indexes.
    Fed Funds is an overnight rate, and no one would use that to price a mortgage. So too is the discount rate.
    Fed Funds is the rate for overnight interbank lending. The discount rate is the rate you can borrow from the Fed for overnight, and in normal times is of merely academic interest, as most banks won't go to the Fed for money because of the stigma. Generally it's taken as meaning you couldn't get enough from the interbank market, and that's not supposed to be a good sign.
    #17     Sep 19, 2010
  8. Larson

    Larson Guest

    #18     Sep 19, 2010
  9. Actually, the account above is not quite correct, not from what I recall...

    The problems in the money mkts started when a couple of BNP money mkt funds that were invested in all sorts of toxic sh1te suspended redemptions. That happened on the 9th of August 2007. On the 13-15th of August the Canadian ABCP conduit Coventree blew up. Rest is history, as they say.
    #19     Sep 19, 2010
  10. 0. Economy becomes highly leveraged by historical standards
    1. Oil goes to the moon
    2. $750B times multiplier of US economic activity goes to petro-heaven
    3. Slowing growth leads to cascading defaults

    Don't really see that the fed has a whole hell of a lot to do with either the cause or the solution.
    #20     Sep 19, 2010