I said you were the man that never sleeped because in reply to me saying, “If I can stop eating, driving, and sleeping…” you said, “I eat and drive too.” I noted the conspicuous absence. Wasn’t sure if you meant it as a funny or not, but I figured I’d run with it.

As for David, I suspect being able to cast his own 70’s sit-com if he so desired makes quiet time for blogging come late or never.

Anyway, from one West Coaster to another, take care.

I agree with both you and David, the key will be what they do when the repos mature. The use of the MBS as collateral on Friday was most likely intended as a signaling device, that the Fed was aware of market participants difficulties, and by using MBS they get extra liquidity relief for their buck. Take note though, that there is no prohibition on the Fed renewing those repos, at least in part, when they mature if they want to (if I remember correctly, the first operation on Friday using the MBS as collateral had a 3 day maturity, so that operation is already done now, collateral returned to the banks). The key thing to watch is where Funds trade in relation to the 5.25% target. David has identified the key factor that has changed here: the more that these “temporary” repos are used on an ongoing basis, reflecting the unrest in the market and Funds inability to trade at 5.25% without assistance, the more likely the Fed is to either undertake substantial permanent operations, or ultimately cut the Funds target.

My bet is they cut the target; the only question is timing and how much financial market and macroeconomic pain Bernanke wants to inflict, in order to solidify his reputation as one tough cookie who won’t bail out Wall Street. That’s a political, and personal question, and I just don’t know the man well enough to guess.

Steve

LOL, it just looks like I don’t sleep because I’m on the West Coast. The more impressive thing is David posting intelligent, coherent, and cogent thoughts at 11:30 PM on the East Coast. I haven’t been able to do that since university LOL.

Steve

My understanding is that of Steven’s (the man who doesn’t sleep. )

The Fed accepted securitized mortgage bonds as collarateral. They did not purchase them. I think a lot of sloppy reporting and heresay has been suggesting they bought them, but I don’t believe that was ever the case.

The goal was to prevent a credit run. Everyone was questioning the value of mortgage bonds and presummably was marking them to worthless, causing margin calls. The Fed stepped in and allowed banks to borrow against those bonds so as to put a floor on the margin calls and inject liquidity. Seems like a two-fer.

As for when they take it back out, I think the presumption is the market will be more orderly and there will have been enough time to establish realistic values for those bonds. Now, if the bonds have been correctly valued all along at 20 cents on the dollar… well then I reckon it does get ugly. Right now, you can see time was bought so haircuts can be administered in an orderly fashion. This is most evident by the Goldman quant fund getting a cash injection from Hank Greenberg among others. Makes me wonder if the guy that ran the NYSE is going to come out of retirement… sheesh, what was his name?

Best.

1st, please refer to me as James – Mr. Dailey is my father! 2nd, I am by no means an expert on Fed operations, but from what I have gathered by reading a lot of people, it appears that the aggressive buying of mortgage paper (yes all gov’t guaranteed and not “private”) is not “normal”. Essentially, they bought what banks wanted to dump and that the Fed is legally allowed to buy. The injection is surely temporary for now and done to bring the target rate back down to 5.25%. However, what happens when they take it back out? I think David hits it on the head here – we’ll see how the credit markets react this week when they try. My guess is it won’t be well received.

I eat and drive too. The problem with basing Fed policy on headline CPI, rather than core, is that it presumes that the Fed can do something about what is affecting food and energy prices. Now, it’s true, that if they really wanted to crush the overall economy, they could drive down the demand for energy, and lower its influence on CPI. Otherwise, however, the FOMC has about as much power over the supply of oil, and the success of different crop harvests, as I do.

And I’m not talking my book, as I have no position in TIPS, but I wouldn’t argue with TIPS if one has a bearish view on headline CPI.

As for a “few evil speculators”, there was a housing bubble gripping at least half the nation. By many measures housing had become totally divorced from any measure of sustainable affordability.

In your first post you referred to folks talking their book, with all due respect I have to wonder about your book.

This is not a question of moral hazard it is a question of monetary policy being too tight for current economic conditions. We have core PCi at 1.9% YOY and the Fed is worried about inflation being to high?!?! This is surreal.

This neo-Austrian pre-occupation with cratering the economy in order to punish a few evil speculators is so wrongheaded that I just pray that the Fed is not foolish and incompetant enough to actually go down that path. I think Herbert Hoover was worried about Moral Hazard back in 1929 and look what resulted.

However, the devil’s in the details. Right now there is considerable doubt as to which financial stocks are high quality. Bear Stearns obviously not. But now even Goldman is having some difficulties of a billion here or there. (Though I am inclined to think they’ll come out doing OK.) I also saw where Citi is claiming about a 1/2 billion dollar loss on merchant lending. The regional banks are up to their eyeballs in mortgages. So, I’m open to suggestions as to which stocks are high quality, because from my vantage point they all seem suspect.

Next, concerning the liquidity helping the strongest the most, it seems commodity producers and international durable goods makers (Cat, Boeing, etc) and bonds of the (Chili, Brazil, India, Russia, etc.) will be out-performers. Yes? Anyone disagreeing, I would appreciate the counter-argument.