Category Archives: Federal Reserve

How the Prisoner’s Dilemma and Unintended Consequences are Accelerating the Credit Crisis

Two readers wrote to me concerning phenomena we’ve mentioned upon occasion in the expanding credit crunch, and it seemed a good opportunity to discuss them longer form. There are two separate, but related threads: we are now seeing a lot of “every man for himself” behavior (liquidity hoarding is one of many examples) that seem […]

Greenspan Now Blames the Risk Models

This is priceless. Being an objectivist means never having to take responsibility for your actions. Greenspan has now decided to pin the financial market crisis on models. Gee, it was your Fed, Mr. Greenspan, that endorsed letting regulated entities decide how to mark and manage their derivative and structured product risks without anyone at the […]

Fed Opens Discount Window to Broker Dealers

The Fed opened the window to broker dealers. This is a shocker, a sign of the Fed’s desperation. Recall that one of the reasons the Fed was able to assure us it wasn’t taking too much risk in its Term Auction Facility was that it said the institutions involved were sound. It doesn’t supervise broker-dealer […]

Bear Buy, Fed Moves (Update 2)

Go out to the gym and big news happens. But hopefully this announcement will stop or at least slow the run on Bear. JP Morgan’s price of $2 a share represents a price of $270 million, or 1/4 the estimated value of Bear’s headquarters building. The discount reflects JPM’s leverage but also the perception that […]

Scramble to Put a JP Morgan-Bear Deal Together

The Wall Street Journal reports that JP Morgan is trying to solidify a deal for Bear before the Asian markets open: Terms of the deal were still being hammered out Sunday afternoon. Reflecting the dire situation at Bear, the company is likely to fetch considerably less on a per-share basis than its stock price of […]

Bear Death Watch: Update and Nightmare Scenarios

Given the weekend, there was not much in the way of news on the Bear Stearns front, save further clarification of how perilous its state is. From CNBC: Department heads at Bear Stearns met with officials at J.C. Flowers and JPMorgan Chase Saturday afternoon to give an overview of their business divisions, including headcount and […]

"A world addicted to easy credit must go cold turkey "

This article by Jeff Randall in the Telegraph does a nice job of looking at the causes of our credit mess and articulating implications. And he quotes my hero Paul Volcker (do you know that he stayed at the Fed fixing the economy even though his wife was very sick and he was having trouble […]

"Debt Reckoning: U.S. Receives a Margin Call"

I rarely feature Wall Street Journal articles in long form because I figure most readers will find them on their own. But the Journal’s Saturday edition isn’t as widely read, and this is an exceptionally good piece, particularly given that the Journal is not the best source on credit market reporting. The ongoing crisis seems […]

Bear Death Watch: Why It Failed

As I am sure you all know by now, Bear Stearns started coming spectacularly unglued last night, and called JP Morgan, who in turn tapped the Fed, who sent examiners who stayed at the firm all night. In the morning, a plan was announced by which the central bank would assume the risk of lending […]

Bear Bailout: Is No One Too Small to Fail?

The news that Bear had to run to the Fed for help with its rapidly deteriorating cash position, and JP Morgan has been muscled into assisting in the rescue is a sign that Bear was deemed too big to fail. The Fed is lending against Bear’s collateral (I haven’t seen an estimate as to how […]

Krugman: Fed is Running Out of Tricks

Krugman, in his New York Times op-ed today, “Betting the Bank,” reminds us that the Fed is much like the Wizard of Oz: the perception of its power vastly exceeds reality. In normal times, the limited tools central bankers have at their disposal can be used to great effect, but extreme conditions reveal their impotence. […]

Hamilton: The Fed Cannot Solve the Credit Crisis

James Hamilton, in “Asking too much of monetary policy,” is trying to talk sense to a Fed that just doesn’t get it. Hamilton ought to have some cred; he proved to be remarkably prescient when he warned in his presentation at the Fed’s Jackson Hole conference of the danger of the markets playing chicken with […]

Fed to the Rescue of Fannie and Freddie

The Fed’s move today to lend up to $200 billion against mortgage backed securities comes as close as one can without an act of Congress to affirming the implicit Federal guarantee of Freddie Mac and Fannie Mae debt. Its new facility, the Term Securities Lending Facility, will lend to primary dealers through 28 day auctions, […]

No Exit: Will "A Short Financial Crisis Become a Long One"?

By happenstance, three articles in the Financial Times provide useful, if disheartening, triangulation on the credit crisis. In sum, the markets are a mess, policymakers don’t agree on what to do, and there may be nothing they can do except make matters worse. Last week was by any standards a bad week, with the Fed’s […]

On Krugman’s Worries and the Breakdown of the Securitization Model

Paul Krugman usually has enough important topics to occupy himself, like the sorry state of health care, income inequality, tax policy, Bush Administration offenses du jour, that he rarely gets around to matters financial. But stress in the markets has again come to the fore, so Krugman is taking a serious look. Not surprisingly, he […]