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Generational Dynamics Web Log for 12-Mar-08
Fed makes massive move to shore up mortgage market

Web Log - March, 2008

Fed makes massive move to shore up mortgage market

Markets around the world surged 3-4%, following Tuesday's announcement by the Fed that it would loan up to $200 billion to investment banks that use mortgage-backed securities as collateral.

(Update: A web site reader points out that it's important to say that the Fed is providing $200 billion in Treasury bills, not $200 billion in cash, in exchange for mortgage-backed securities as collateral. This means that there's no addition of liquidity to the financial system, since the Fed is swapping asset for asset.) (This paragraph was added on March 13.)

Intraday Dow Industrials chart and final results for Tuesday, March 11, 2008

Intraday Dow Industrials chart and final results for Tuesday, March 11, 2008

The purpose of this move is to effect a rifle-shot target on the "credit crunch," which is thought to be blamed on forced writedowns of mortgage-backed CDOs. According to this reasoning, if the Fed can find a magic bullet that ends the forced writedowns, then the credit crunch will end, and the leaking credit and stock market bubbles will start reflating.

The announcement was made at 8:30 am ET on Tuesday, and European markets immediately responded. The Dow Industrials gained 384 points at the 9:30 am opening, the second largest opening gain in Wall Street history. By the time the market had closed, all three indexes had gained almost 4%.

Here are the remarks of some of pundits and analysts:

"This this is the day the market turns around."

"The Fed really means it this time.

"This is the first time I've felt that the Fed was on top of this problem."

"History will look back on today as the day that the market turned around and went up again."

"The Fed has pumped massive amounts of liquidity into the mortgage market."

"Fed exhibited its most intense and unique intervention in this economy yet."

"This won't be just a one-day pop; this will cause the market to go up for many days in a row."

"This is the best day for stocks in years."

Well, what do you think? Is the euphoria justified? Is March 11, 2008, destined to go down in history? Is this the day that the world financial crisis finally melts away?

Anyone who's read this web site for more than a few days already knows that this is impossible. The massive credit bubble is deflating, and can't reflate. The world financial system is entering a deflationary spiral in which trillions of dollars in money will disappear as credit markets continue to retrench.

I've been constantly surprised by wide variety of desperate attempts that have been made to reflate the credit bubble.

Whether it's Citibank's mind-boggling Master-Liquidity Enhancement Conduit (M-LEC), or the bond insurers' fraudulent AAA ratings, or the Fed's increasingly dramatic liquidity-injection stalling maneuvers, all they do is distort the financial system even more, and make sure that the unavoidable crisis will be even worse.

It's almost like a vaudeville show -- each act has to be good, and each act has to top the act before it. How many more acts does the Fed have, before we reach the Grand Finale?

From the point of view of Generational Dynamics, the last generational panic and crash occurred in 1929, and we're now overdue for the next one. It might occur tomorrow, next week, next month, or next year.

I've estimated that the probability of a major financial crisis (generational stock market panic and crash) in any given week from now on is about 3%. The probability of a crisis some time in the next 52 weeks is 75%, according to this estimate. (12-Mar-08) Permanent Link
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Generational Dynamics Web Log for 12-Mar-08 Fed makes massive move to shore up mortgage market

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Generational Dynamics Web Log for 12-Mar-08
Fed makes massive move to shore up mortgage market