Comments on: The Fed Acts, and the Stock Market Yawns http://www.nakedcapitalism.com/2007/08/fed-acts-and-stock-market-yawns.html Sun, 22 Nov 2009 07:56:24 -0500 http://wordpress.org/?v=2.8.4 hourly 1 By: Yves Smith http://www.nakedcapitalism.com/2007/08/fed-acts-and-stock-market-yawns.html#comment-418 Yves Smith Fri, 17 Aug 2007 19:23:00 +0000 http://www.nakedcapitalism.com/2007/08/the-fed-acts-and-the-stock-market-yawns/#comment-418 Helpful stuff. Thanks.<br/><br/>Bur remember, Bagehot recommended lending at penalty rates against <i>good</i> collateral. The ABCP seize up is assumed to be a liquidity rather than a solvency crisis. But is all of it good? And even if it is good now, won't some of it go into distress as the housing market deteriorates further? Helpful stuff. Thanks.

Bur remember, Bagehot recommended lending at penalty rates against good collateral. The ABCP seize up is assumed to be a liquidity rather than a solvency crisis. But is all of it good? And even if it is good now, won’t some of it go into distress as the housing market deteriorates further?

]]> By: Anonymous http://www.nakedcapitalism.com/2007/08/fed-acts-and-stock-market-yawns.html#comment-417 Anonymous Fri, 17 Aug 2007 18:46:00 +0000 http://www.nakedcapitalism.com/2007/08/the-fed-acts-and-the-stock-market-yawns/#comment-417 I'm hoping that the Fed has enough intellectual firepower that this is actually a good move. If either the Federal Funds market is breaking down because of a lack of acceptable collateral (per Orlov quoted above) or the Fed's anticipating future spikes in the FFR, this may be a move toward following Bagehot's advice and lending at a penalty rate. Banks can get the accomodation they need but only at 50 basis points above the FFR. On the other hand the new crisis monetary policy can be to allow the FFR to fluctuate -- with a cap at the discount rate. In other words I'm hoping there's enough intellectual firepower at the Fed that this is actually a rate increase in disguise.<br/><br/>The Fed needs to experiment with what an acceptable spread between the rates is. A 100 point spread is probably too risky as a starting point for a huge monetary policy shift, but would have been a mighty low penalty rate by Bagehot's standards. I’m hoping that the Fed has enough intellectual firepower that this is actually a good move. If either the Federal Funds market is breaking down because of a lack of acceptable collateral (per Orlov quoted above) or the Fed’s anticipating future spikes in the FFR, this may be a move toward following Bagehot’s advice and lending at a penalty rate. Banks can get the accomodation they need but only at 50 basis points above the FFR. On the other hand the new crisis monetary policy can be to allow the FFR to fluctuate — with a cap at the discount rate. In other words I’m hoping there’s enough intellectual firepower at the Fed that this is actually a rate increase in disguise.

The Fed needs to experiment with what an acceptable spread between the rates is. A 100 point spread is probably too risky as a starting point for a huge monetary policy shift, but would have been a mighty low penalty rate by Bagehot’s standards.

]]> By: Anonymous http://www.nakedcapitalism.com/2007/08/fed-acts-and-stock-market-yawns.html#comment-416 Anonymous Fri, 17 Aug 2007 18:26:00 +0000 http://www.nakedcapitalism.com/2007/08/the-fed-acts-and-the-stock-market-yawns/#comment-416 Mikhail Orlov's comment in another blog:<br/><br/>"Let me get this straight. There is an overnight REPO inter-bank rate, set at 5.25%. There is a Fed discount window that used to be 6.25% and now 5.75%. Why someone in their right mind would pay more if cheaper overnight rate is available? Why any prime broker-dealer would ever use discount window? <br/>Now, REPO apparently requires hard collateral such as US treasuries. Fed now is willing to accept MBS, which other banks refuse to lend against! That means we do not have a liquidity crisis! If that was the case – REPO rates must have been higher than Fed discount window rates. We have a crisis of banks not having enough “good” collateral and not trusting each other with all this MBS junk. <br/>That perfectly explains why effective overnight rate has been well below Fed target rate. There is no demand for the inter-bank funds, demand that can be backed with required collateral! <br/>With that, even if Fed lowers rate to zero – it is not going to help at all. Banks will not be willing to lend to each other because there is no collateral to lend against! " Mikhail Orlov’s comment in another blog:

“Let me get this straight. There is an overnight REPO inter-bank rate, set at 5.25%. There is a Fed discount window that used to be 6.25% and now 5.75%. Why someone in their right mind would pay more if cheaper overnight rate is available? Why any prime broker-dealer would ever use discount window?
Now, REPO apparently requires hard collateral such as US treasuries. Fed now is willing to accept MBS, which other banks refuse to lend against! That means we do not have a liquidity crisis! If that was the case – REPO rates must have been higher than Fed discount window rates. We have a crisis of banks not having enough “good” collateral and not trusting each other with all this MBS junk.
That perfectly explains why effective overnight rate has been well below Fed target rate. There is no demand for the inter-bank funds, demand that can be backed with required collateral!
With that, even if Fed lowers rate to zero – it is not going to help at all. Banks will not be willing to lend to each other because there is no collateral to lend against! “

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