Financial firms worry about more credit turmoil after Labor Day - 04-Sep-07 - Generational Dynamics

The Fed's discount rate actions appear to have been a failure, according to Morgan Stanley analysts Ted Wieseman and David Greenlaw.

The Fed took several steps on August 17 to ease credit problems: It lowered the discount interest rate from 6.25% to 5.75%, to make it easier for banks to borrow funds from the Fed and lend them to other businesses.

Possibly even more important, the Fed is willing to accept asset-backed commercial paper (ABCP) as collateral for the loans from the discount window, even when the assets were based on subprime mortgage loans. This provides a means for banks to get past immediate liquidity problems by being unable to sell expiring commercial paper.

Macroeconomics

Understanding deflation: Why there's less money in the world today than a month ago.: As the markets continue to fall, the Fed is increasingly in a big bind.... (10-Sep-07)

Alan Greenspan predicts the panic and crash of 2007: He's said this kind of thing before, but this time it's resonating.... (08-Sep-07)

Bernanke's historic experiment takes center stage: An assessment of where we are and where we're going.... (27-Aug-07)

How to compute the "real value" of the stock market. : And some additional speculations about stock market crashes. (20-Aug-2007)

Ben Bernanke's Great Historic Experiment: Bernanke doesn't believe that bubbles exist. His Fed policy will now test his core beliefs.... (18-Aug-07)

Redemptions of money market funds now fully in doubt: Wednesday is the deadline for 3Q redemption of many hedge fund shares.... (15-Aug-07)

Alan Greenspan defends his Fed policies, as people blame him for the subprime crisis: Greenspan never ceases to amaze, and he did so again on Monday.... (8-Aug-07)

Nouriel Roubini says: "Worry about systemic risk." Whoo hoo!: His arguments show what's wrong with mainstream macroeconomics.... (6-Aug-07)

Robert Shiller compares stock market to 1929: He says the recent fall was caused by "market psychology," but is puzzled why.... (20-Mar-07)

A conundrum: How increases in 'risk aversion' lead to higher stock prices: Maybe because the global financial markets are increasingly "accident-prone."... (12-Mar-07)

Pundits are suddenly talking about (gasp!) "risk aversion": Fearing full-scale panic in the mortgage loan marketplace,... (6-Mar-07)

Alan Greenspan blames the housing bubble on the fall of the Berlin Wall: Meanwhile, the stock market keeps skyrocketing and appears unstoppable to many investors.... (25-Oct-06)

System Dynamics and the Failure of Macroeconomics Theory : Mainstream macroeconomic theory, invented by Maynard Keynes in the 1930s, has failed to predict or explain anything that's happened since the bubble started, including the bubble itself. We need a new "Dynamic Macroeconomics" theory. (25-Oct-2006)

Alan Greenspan gives another harsh doom and gloom speech: Saying that "the consequences for the U.S. economy of doing nothing could be severe,"... (4-Dec-05)

Ben S. Bernanke: The man without agony : Bernanke and Greenspan are as different as night and day, despite what the pundits say. (29-Oct-2005)

Fed Chairman Alan Greenspan says that the deficit is out of control: France's Finance Minister Thierry Breton quoted Greenspan... (25-Sep-05)

Fed Governor Ben Bernanke blames America's sky-high public debt on other nations: I'm normally wary of applying specific generational archetypes to individuals, but Bernanke is acting like a Baby Boomer.... (14-Mar-05)

Greenspan's testimony further repudiates his earlier stock bubble reasoning: The Fed Chairman has now completely reversed his previous position on the stock market bubble... (17-Feb-05)

Alan Greenspan warns that global economic dangers are without historical precedent : In a speech on Friday, Greenspan buried a major change of position in a speech admitting that his assumptions about the economy for the last decade were wrong. (6-Feb-2005)

It now turns out that the Fed has placed tight restrictions on using ABCP as collateral. The result is that the Fed's discount window is too expensive for "economically sensible" banks, according to the Morgan Stanley analysis. "The discount window actions now appear a failure, with apparently no new borrowing in the latest week after purely symbolic borrowing from four financially strong banks with access to cheaper funding in the prior week," according to Morgan Stanley.

As we indicated in my article, "Bernanke's historic experiment takes center stage," we're now at a crucial point in economic history, where Fed chairman Ben Bernanke is putting into practice his core beliefs, acquired on his grandmother's knee as a child in the 1960s: That the 1930s Great Depression could have been avoided, and a future Great Depression can be avoided, by injecting money into the economy.

But you should understand exactly what failed, because it's important. It's not that the Fed injected a bunch of money into the economy, and the money didn't have the desired effect. That's not what happened.

What happened is that the Fed failed in its attempt to inject money into the economy. It's almost as if the Fed couldn't give away money. (Is someone from the Fed reading this? If you are, I'll take some money!)

The view that this should have worked is based on macroeconomic theory that was developed in the 1970s and 1980s, and has completely failed in the last 15 years, failing to predict or explain the 1990s dot-com bubble, or anything that's happened since then.

According to mainstream macroeconomic theory, the world's financial state should have been getting better and better, but instead has been getting worse and worse.

And now it's failing to do something that would have been thought to be incredibly simple: Injecting money into the economy. That should be easy, right? Maybe it will work, maybe it won't, but at the very least it should be possible to shovel money out, right? Well, mainstream macroeconomics is even wrong about that simple thing.

Some days, mainstream macroeconomics seems to be wrong about just about everything.

Generational Dynamics looks at things differently, much more dynamically than mainstream models. Mainstream models assume that you can decide policy just by looking at data from the last year. Generational Dynamics says that you really have to look at decades of data.

It is unquestionably clear that something spectacular changed -- on a global scale -- on July 19 and July 23 of this year.

The market, as measured by the Dow Jones Industrial Average, peaked on July 19. After that some kind of "tipping point" clearly occurred, when wild market volatility began on July 23. This signaled a change in the attitudes and behaviors of large masses of investors from "risk-seeking" or "risk-ignoring" to a "risk-averse" pattern. This has been widely reported in the media, though pundits have been saying recently that it's all over now, and things have settled down.

From the point of view of Generational Dynamics, these attitudes towards risk are not formed in one day, or because of one event. They're formed by transitions within entire generations, and the attitudes are formed over long decades.

Once you understand that, then you understand why these simple prophylactic measures by the Fed can't possibly work. There are tens of millions of people in an American generation, and it's doubtful that more than a few dozen are going to be substantially affected by anything the Fed does. Being "risk-ignoring" or "risk-averse" cannot and will not be changed quickly.

There's plenty of reason to believe that deep-seated problems in the economy are getting worse. Market interest rates surged at the end of last week, after institutions became aware of the restrictions on ABCP mentioned several paragraphs up. Many of these institutions have billions of dollars of this commercial paper on their books, theoretically rated AAA. But more and more, institutions realize that in fact they have no idea whatsoever whether their commercial paper has the value they think it has.

Generational Dynamics Web Log for 04-Sep-07
Financial firms worry about more credit turmoil after Labor Day

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Generational Dynamics Web Log for 04-Sep-07 Financial firms worry about more credit turmoil after Labor Day

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Generational Dynamics Web Log for 04-Sep-07
Financial firms worry about more credit turmoil after Labor Day