Bernanke caused the Great-Recession all by himself

[flow5]

"The transmission mechanism for monetary policy seems to be solely through interest rates"

Liquidity is supplied by the FRB-NY's "trading desk" buying government securities in the secondary market. Bankrupt you Bernanke actually drained CB liquidity (first for 29 consecutive months). Bankrupt you Bernanke allowed it's SOMA securities portfolio to roll off without their replacement & reinvestment.

SEE: 24 month rate-of-change in RRs (required reserves) or the proxy for inflation for the last 100 years:

2006 jan ,,,,,,, 45496 ,,,,,,, 0.04
,,,,, feb ,,,,,,, 43084 ,,,,,,, 0.01
,,,,, mar ,,,,,,, 41242 ,,,,,,, -0.02
,,,,, apr ,,,,,,, 42920 ,,,,,,, -0.03
,,,,, may ,,,,,,, 43648 ,,,,,,, -0.02
,,,,, jun ,,,,,,, 43278 ,,,,,,, -0.01
,,,,, jul ,,,,,,, 43328 ,,,,,,, -0.03
,,,,, aug ,,,,,,, 41162 ,,,,,,, -0.06
,,,,, sep ,,,,,,, 40865 ,,,,,,, -0.08
,,,,, oct ,,,,,,, 40088 ,,,,,,, -0.08
,,,,, nov ,,,,,,, 40543 ,,,,,,, -0.06
,,,,, dec ,,,,,,, 41461 ,,,,,,, -0.07
2007 jan ,,,,,,, 43113 ,,,,,,, -0.11
,,,,, feb ,,,,,,, 41214 ,,,,,,, -0.09
,,,,, mar ,,,,,,, 39159 ,,,,,,, -0.11
,,,,, apr ,,,,,,, 41072 ,,,,,,, -0.09
,,,,, may ,,,,,,, 42699 ,,,,,,, -0.05
,,,,, jun ,,,,,,, 42034 ,,,,,,, -0.05
,,,,, jul ,,,,,,, 41164 ,,,,,,, -0.08
,,,,, aug ,,,,,,, 39906 ,,,,,,, -0.07
,,,,, sep ,,,,,,, 40460 ,,,,,,, -0.07
,,,,, oct ,,,,,,, 40161 ,,,,,,, -0.04
,,,,, nov ,,,,,,, 40331 ,,,,,,, -0.04
,,,,, dec ,,,,,,, 41048 ,,,,,,, -0.04
2008 jan ,,,,,,, 42398 ,,,,,,, -0.07
,,,,, feb ,,,,,,, 41070 ,,,,,,, -0.05
,,,,, mar ,,,,,,, 39731 ,,,,,,, -0.04
,,,,, apr ,,,,,,, 41642 ,,,,,,, -0.03
,,,,, may ,,,,,,, 43062 ,,,,,,, -0.01
,,,,, jun ,,,,,,, 41616 ,,,,,,, -0.04
,,,,, jul ,,,,,,, 42083 ,,,,,,, -0.03
,,,,, aug ,,,,,,, 42055 ,,,,,,, 0.02
,,,,, sep ,,,,,,, 42456 ,,,,,,, 0.04
,,,,, oct ,,,,,,, 46930 ,,,,,,, 0.17
,,,,, nov ,,,,,,, 50363 ,,,,,,, 0.24
,,,,, dec ,,,,,,, 53723 ,,,,,,, 0.3


Then as the trajectory for RRs (in Dec 2007) indicated that a recession would begin in the 4th qtr of 2008, Bankrupt you Bernanke drained liqudity just as real-gDp collapsed.

When the Central Bank pays the commercial banks not to lend (excess reserves remunerated @.25%), this drains the supply of loan-funds (not the supply of money). There is no liquidity trap. The wholesale funding market for the SBs & NBs was decimated by the Fed introducing its IOeR policy.

POSTED: Dec 13 2007 06:55 PM |

The Commerce Department said retail sales in Oct 2007 increased by 1.2% over Oct 2006, & up a huge 6.3% from Nov 2006.

10/1/2007,,,,,,,-0.47,... -0.22 * temporary bottom
11/1/2007,,,,,,, 0.14,,,,,,, -0.18
12/1/2007,,,,,,, 0.44,,,,,,,-0.23
1/1/2008,,,,,,, 0.59,,,,,,, 0.06
2/1/2008,,,,,,, 0.45,,,,,,, 0.10
3/1/2008,,,,,,, 0.06,,,,,,, 0.04
4/1/2008,,,,,,, 0.04,,,,,,, 0.02
5/1/2008,,,,,,, 0.09,,,,,,, 0.04
6/1/2008,,,,,,, 0.20,,,,,,, 0.05
7/1/2008,,,,,,, 0.32,,,,,,, 0.10
8/1/2008,,,,,,, 0.15,,,,,,, 0.05
9/1/2008,,,,,,, 0.00,,,,,,, 0.13
10/1/2008,,,,,,, -0.20,,,,,,, 0.10 * possible recession
11/1/2008,,,,,,, -0.10,,,,,,, 0.00 * possible recession
12/1/2008,,,,,,, 0.10,,,,,,, -0.06 * possible recession

Trajectory as predicted:

Bankrupt you Bernanke should have seen this coming.

</SPAN></P>

[flow5]

You can’t compare absolute figures - only their rates-of-change (i.e., if there’s a correlation in the first place). 

But QE (quantitative easing) & Federal Reserve Bank Credit (total assets) are not interchangeable.

See #1: FOMC Vice Chairman, & President of the FRB-NY’s testimony: “Money banking textbooks written before 2008 are ‘now obsolete’, as the Fed now has the ability to pay interest on excess reserves.”

See #2: Monetary policy (per William Dudley), seeks “an IOeR (remuneration) rate consistent with the (1) amount of required reserves, (3) money supply & (3) commercial bank credit outstanding"

On the April 11, 2013 H.4.1 release “Factors Affecting Reserve Balances of Depository Institutions and the Consolidated Condition Statement of Federal Reserve Banks

Total factors supplying reserve funds = $3,271,458 trillion.
Total factors absorbing reserve funds = $1,420,097 trillion

The residual is the CB’s reserve balances (IBDDs) held at their respective District banks = $1,851,361 trillion

And on the April 3, 2013 H.3 release: “Aggregate Reserves of Depository Institutions & the Monetary Base” where:

excess reserves = $1,726,553 trillion, 
required reserves = $144,122 billion.

See #3: Quantitative Easing and Money Growth: 
Potential for Higher Inflation? Daniel L. Thornton 

Thornton: “It is important to note that the $308.7 billion increase in total checkable deposits since QE2 occurred with only a $27.5 billion increase in required reserves. This reflects the relatively low effective reserves requirement on checkable deposits, apparently about 9 percent ($27.5/$308.7).”

I.e., our means-of-payment money (93-96% of all bank debits clear thru these deposit classifications) is linked to legal or required reserves (to be maintained 30 days hence).

The actual monetary transmission mechanism is not via interest rate manipulation, it is thru that small volume of business & consumer deposits. 

V.P. Fed’s technical staff: “There is general agreement that, for almost all banks throughout the world, statutory reserve requirements are not binding. Banks need central bank deposits for clearing checks & making other interbank payments, which gives the central bank leverage over money & bond markets.”

And monetary lags (roc’s) are not as Nobel Laureate Milton Friedman said “long & variable”; they have been mathematical constants for 100 years. The proxy for real-output is 10 months (courtesy of the Bank Credit Analyst – debit/loan ratio), & the proxy for inflation is 24 months (courtesy of "The Optimum Quantity of Money" - Friedman (i.e., with the caveat: as the weighted arithmetic average of reserve ratios & reserveable liabilities remains constant.)

[flow5]

A liquidity trap implies that POMOs don't stimulate the economy (by lowering interest rates). 

But the Fed has virtually an unlimited supply of "eligible collateral" for "pump priming" (all government & government guaranteed securities).  But since the Fed pays the banks not to lend, or to invest, the CBs hold large excess reserve balances - as opposed to purchasing short-term Treasuries.  In prior recoveries, when the CBs made these short-term investments, they enlarged the money stock (& stimulated the economy).  The IOeR policy of October 2008 emasculated the Fed's "open market power". 

Both LSAPs & Twists have combined to flatten (compress) the yield curve - when the CBs have traditionally needed at least a 3% net interest margin to survive (i.e., a positively sloped yield curve).

[Aman A.K.A. Ahamburger]

But since the Fed pays the banks not to lend, or to invest, the CBs hold large excess reserve balances - as opposed to purchasing short-term Treasuries

 Exactly!  The banks are hording money because the SUB-PRIME MBS market caused the housing crash.  The housing bubble that popped was caused by PEOPLE using their homes as credit cards and the HERD mentality in to insanely overpriced homes.  Honestly, the fact the you hold Ben B. completely responsible for the housing bubble popping at this point is laughable flow. 

You continue to skirt the MBS point in other threads as well, and as I have said in those other threads the liquidity was draining so fast from the market it doesn't show up in your numbers.  Therefore you ignore the facts and come to the conclusion that Ben B was draining money from the markets.  You refuse to accept that these brains didn't see the full extent of the problem in the early part of '07 and that is the whole problem, you're looking for a conspiracy here and you fail to see the hubris. If Ben B. wouldn't have acted, or drained the market as you claim, he would have bankrupted you me and everyone else in the world and we wouldn't be sitting here having this conversation.

This paper goes further into detail on what my thoughts on the subject are if you or anyone else wants to get futher into it. I will post a few quotes though for reference. 

I test and find supporting evidence for the precautionary motive hypothesis of liquidity hoarding for U.S. commercial banks during the recent financial crisis. I find that banks held more liquid assets in anticipation of future expected losses from securities write-downs. Exposure to securities losses in their investment portfolios, and expected loan lossess (measured by loan loss reserves) represent a more accurate measure of banks’ risks than conventional off-balance sheet risk measures such as the proportion of unused loan commitments to bank lending capacity. I also find important differences in liquidity hoarding across bank size. Although banking institutions of all sizes increased their holdings of liquid assets during the crisis, the reasons behind such behavior differ depending on their size. Large unused commitments are a key determinant of increased liquid buffers only for large banks. For small and medium-sized banks the relevant source of liquidity risk is their exposure to securities losses. ................

................At the onset of the financial crisis in the summer of 2007, short-term funding markets experienced a severe disruption: securitization markets—in particular the market for assetbacked commercial paper—collapsed and interbank markets froze (Strahan, 2008; Brunnermeier, 2009). Although conditions improved in early 2008 relative to late 2007 due to an aggressive policy response and a massive liquidity injection into the banking sector, funding markets experienced significant distress again during the fall of 2008 after Lehman Brothers and AIGfailed, and Fannie Mae and Freddie Mac were placed under conservatorship.............

........................... Concerned about the size and location of the exposure to subprime-related assets, banks stopped lending to other banks, and decided to hoard liquid buffersin response to several factors: widespread concerns about the solvency of their counterparties in interbank operations, increased risks in their asset portfolios, and potential liquidity risk arising from draw-downs of committed lines of credit...............

.................Banks accumulated cash and excess reserves at the central bank because of the interest earned on reserve balances. Banks also accumulatedsecurities such as mortgage-backed securities (MBS) issued or guaranteed by Fannie Mae and Freddie Mac. These securities had a positive return due to an implicit government guarantee, and provided valuation gains that partly compensated for the losses generated by subprime mortgagerelated securities............

...................... In an effort to ease conditions in interbank and credit markets, the Federal Reserve provided a significant amount of liquidity to the banking sector via several new facilities.3Figure1 depicts these lending facilities designed to support the liquidity of financial institutions between 2007 and 2010. Credit extended through lending facilities totaled $1600 billion in 2008 and $250 billion in 2009.......................

..................As a result of this aggressive response to the credit crisis, the Federal Reserve’s balance sheet increased from about $1 trillion in the summer of 2007 to about $2.2 trillion by the end of 2009.

[flow5]

Ahamburger: you just provide more "grist for the mill". When Bankrupt you Bernanke drained the 24 month roc in RRs (the proxy for inflation), for 29 consecutive months, he not only pricked the housing bubble, but drove down housing prices (& other assets which serve as loan collateral). I.e., it was not M2M accounting, etc., per se that precipitated the dysfunctional markets (illiquidity & fire sales). It was Bankrupt you Bernanke's monetary transmission mechanism - interest rates.

[flow5]

Lowering interest rates does not inject liquidity. Roc's in MVt = roc's in nominal-gDp.

And the paper has this wrong about 2007: "due to an aggressive policy response and a massive liquidity injection into the banking sector"


There was no injection of liquidity by the Fed. I posted:

·         7:50 AM on 06/29/07 
 

·         The rate-of-change in the proxy for real-gdp (monetary flows MVt) peaks in July. The rate change in the proxy for inflation (monetary flows MVt) peaks in July. Therefore it should be obvious: interest rates peak in July.

[flow5]

2007: "short-term funding markets experienced a severe disruption: securitization markets—in particular the market for asset-backed commercial paper—collapsed and interbank markets froze"

&

2008: "Such panic centered on the repurchase agreement (repo) market, which suffered a run when lenders withdrew their funds by declining to roll over their loan agreements, and by raising their repo haircuts"
-----


The IOeR policy blunder was responsible for drying up much of the interbank market & short-term wholesale funding markets.

The IOeR policy induced dis-intermediation (like during the 1966 S&L crisis), where the size of the NBs shrink, but the size of the CB system remains the same.

It’s not that the SBs & NBs are deleveraging (debt reduction, asset liquidation, rebalancing), because their customers (business & consumer) are downsizing, or restructuring their own house-hold balance sheets. It’s not an increase in consumer delinquencies or charge-offs (which hit a bank’s undivided profits account). It’s not FASB “MTM” accounting “true ups”. It's not that borrowers & lenders can't service their current obligations from their incomes received. It’s not dis-saving due to account liquidation or redemptions.  It’s not non-performing loans which necessitate selling non-core assets

The maturity mis-matches are being generated on the liability side of the NB's balance sheets. There's a (policy induced) outflow of loan-funds (short-term wholesale funding), from the NBs (or negative cash flow), which shrinks the size of the NBs & forces the Fed to counteract this deflationary effect - by following an easier money policy (expanding CB credit).

Examples of these shadow bank liabilities include: brokered CDs, asset-backed commercial paper (ABCP), interbank repurchase agreements, etc.

If the NBs can’t renew, rollover, refinance, or reinvest their contingent liability exposures, then they must sell off their earning assets (deleverage). But even with new financing, the NB's cost of capital (payment periods, risks, & rates-of-return), are reset, or restructured (lowering net-interest rate profit margins).

I.e., given the business model (where long-term loans are funded through short-term deposits & other liabilities (e.g., derivatives: swaps, options, & securitization), the banks must match their aggregated liabilities (by duration buckets) with the corresponding earning assets to achieve positive cash flows (prevent gaps between the inflows & outflows of contractual collateral & cash), i.e., to maintain their liquidity & solvency.

But Bankrupt you Bernanke thinks a CB is a financial intermediary (doesn't know the difference between money & liquid assets). Never are the CBs intermediaries in the savings-investment process. From the standpoint of the system, CBs always create new money when they lend & invest. They do not loan out existing deposits (saved or otherwise).

But the CBs (or Reserve Bank), can out bid the NBs for savings - thereby impounding savings within the system. The NBs are not in competition with the CBs. Money flowing to the SBs never leaves the CB system. It's impossible to take money out of the system unless e.g., your hoarding currency. Thus the IOeR policy will generate ever higher levels of stagflation (business stagnation accompanied by inflation).

[flow5]

"The banks are hording money because the SUB-PRIME MBS market caused the housing crash"

The National Case-Shiller home price index peaked in the 2nd qtr of 2006 (as Bankrupt you Bernanke first tightened) @ 189.93.  By the 4th qtr of 2007 the index sank to 170.75. 

Bankrupt you Bernanke engineered the decline in residential & commercial real-estate prices (the one major factor that precipitated the liquidity crisis):

"increased risks in their asset portfolios"

Greenspan never tightened & Bankrupt you Bernanke never eased. Case closed.

[flow5]

"the liquidity was draining so fast from the market it doesn't show up in your numbers.  Therefore you ignore the facts and come to the conclusion that Ben B was draining money from the markets"
----

Your talking about both (1) bank credit contraction & (2) dis-intermediation. And your talking about the effect (not the cause). Excessive speculation (& financial innovation) was predominately a symptom.  It was the byproduct of the excessive expansion (the mis-allocation & mal-distribution) of available credit.

Without backstops to the bank holding companies the entire superstructure of credit would contract & if left alone, debt deflation (de-leveraging), had the potential to accelerate -- to become dis-orderly, cumulative, & reinforcing. Commercial bank credit contraction depends on the volume & distribution of excess reserves in the system & the speed at which the troubled bank's are able & willing to discount their assets with the Central Bank.

Bernanke established an array of liquidity funding facilities to meet these liquidity demands.  However these facilities & programs were months too late, & billions of dollars too short.

Unfortunately the NBs & SBs bore the brunt of the liquidity crisis (lost $6 trillion + in assets).

CB credit peaked on 10/22/2008 @  $9,552.5601 trillion & bottomed on 3/03/2010 @ $8,819.1106 trillion (a 7.7% peak-to-trough decline).  And that decline was only arrested because of FAS 166 & FAS 167 rule changes governing off-balance-sheet transactions in January 2010.

[Aman A.K.A. Ahamburger]

Case closed.

  IN your mind flow.  But since you have already stated that if people knew the "truth" there would be antisemitism abound from all of this.  AKA, you have a bias opinion on the matter and you are trying to skew the facts to suit your point.  You are blatantly LYING about what caused the crisis and to believe the title of this thread is like believing that the housing market would have continued to rocket upwards(false). If you want to keep spreading misinformation using 20/20 rear view, go for it, all your math proves is that the bottom was falling out of the market, which is something everyone knows happened, but didn't see at the time. 

Subprime mortgage crisis

  The percentage of lower-quality subprime mortgages originated during a given year rose from the historical 8% or lower range to approximately 20% from 2004 to 2006, with much higher ratios in some parts of the U.S.[2][3] A high percentage of these subprime mortgages, over 90% in 2006 for example, were adjustable-rate mortgages.[4] These two changes were part of a broader trend of lowered lending standards and higher-risk mortgage products.[4][5] Further, U.S. households had become increasingly indebted, with the ratio of debt to disposable personal income rising from 77% in 1990 to 127% at the end of 2007, much of this increase mortgage-related.[6]

Ben B. did lower rates in '07.....

Press Release Release Date: October 31, 2007

September 18 2007
Interest rates slashed to help economy Fed's dramatic action lowers target on key short-term rate for the first time in 4 years - to 4.75% - and signals more cuts could be coming.

The Federal Reserve cut the target on a key short-term interest rate by half of a percentage point Tuesday to 4.75% in a bold acknowledgement that the central bank is concerned the mortgage meltdown plaguing Wall Street and Main Street could hurt the economy.

The Fed also indicated that more rate cuts could be on the way, news that investors cheered.

 He said Wall Street was cheering the rate cut because it proves the Fed is willing to take any moves necessary to ensure the economy is not derailed by problems in the subprime mortgage market, loans made to consumers with less-than-perfect credit.

But he also injected money into the system.....

August 13 2007
Fed injects $2B more into banking system

The Federal Reserve injected an additional $2 billion into the banking system Monday, marking the second time in as many sessions that the central bank has taken steps to help soothe jittery financial markets.

On Friday, the central bank injected $38 billion into the U.S. banking system in an effort to cool Wall Street fears about a credit crunch. The New York Fed said in a statement it was ready to conduct additional operations during the day as needed.

Here is another one describing the operations at the Fed and how the injected the money.....

 How Does the Fed Inject Money into the Economy? A Primer

Its principal means of doing this is via open market operations. To put downward pressure on interest rates, the Fed would buy securities in the open market from a designated dealer (primary dealer). The Fed pays for the securities by crediting the account of the dealer’s bank at the Fed. The bank now has more reserves than it needs, and so it lends them out, pushing down the federal funds rate. This operation results in an expansion of the Fed’s balance sheet and thus the money supply. 

Here some more facts flow, not antisemitic bias opinions based on math like this thread is.......

Ask Dr. Econ August 2007

The short answer is that the financial system experienced some serious liquidity shortages in August 2007, and the Fed injected funds to help keep financial markets operating effectively so that they would continue to support ongoing economic activity.
For a longer (and more complete) answer, I’ll refer to a speech by Federal Reserve Chairman Ben Bernanke from October 2007 that clearly explains the sequence of the financial crisis that unfolded in August 2007, starting with how it relates to the mortgage market:
At one time, most mortgages were originated by depository institutions and held on their balance sheets. Today, however, mortgages are often bundled together into mortgage-backed securities or structured credit products, rated by credit rating agencies, and then sold to investors. As mortgage losses have mounted, investors have questioned the reliability of the credit ratings, especially those of structured products. Since many investors had not performed independent evaluations of these often-complex instruments, the loss of confidence in the credit ratings led to a sharp decline in the willingness of investors to purchase these products. Liquidity dried up, prices fell, and spreads widened. Since July, few securities backed by subprime mortgages have been issued.

Remember how S&P and others rates all these garbage MBS products AAA?  I guess that had nothing to do with it though, as Ben B. created the recession all by himself... 

Well would you lookie here, another interesting blog about the operations at the Fed on '07.....

Will the Fed's Liquidity Injection Help Stocks?

There has been a ton of hype (CNBC, etc.) on the Fed injections on August 9th and 10th and how that "new liquidity" will be good for stocks. We can't say that we agree. While a stance of "easy money" on the part of the Fed might actually help stocks short term, over any period longer than a few months, economic fundamentals will dictate the direction of equity markets.
In this post, we hope to (1) differentiate between "liquidity" and "money supply"; (2) delineate the true nature of a Fed open market operation (OMO); (3) bring some context to the discussion in terms of the size of the variables we're examining - GDP, the money supply, and Fed OMOs; and (4) determine whether money supply is a better monetary indicator for stocks.

But hey, you have numbers that prove the banking system was draining money and that had to because of Ben B. and his Jewish friends, right? Not because of a negative savings rates, massive debt, and people defaulting on their mortgages.  I mean it's not like you have said in other threads to watch the consumer or anything... 

[flow5]

xxx 

[flow5]

ccccc

[flow5]

Permanent OMOs: Treasury

The purchase or sale of Treasury securities on an outright basis adds or drains reserves available in the banking system. Such transactions are arranged on a routine basis to offset other changes in the Federal Reserve’s balance sheet in conjunction with efforts to maintain conditions in the market for reserves consistent with the federal funds target rate set by the Federal Open Market Committee (FOMC).


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Operation - RESULTS

Operation Date: 05/03/2007

Operation: Coupon Purchase

Settlement Date: 05/04/2007

Maturity/Call Date Range: 11/15/2009 - 11/15/2010

Total Par Accepted:* 1,396

Total Par Amt Submitted:* 10,219



Operation - RESULTS

Operation Date: 05/02/2007

Operation: Coupon Purchase

Settlement Date: 05/03/2007

Maturity/Call Date Range: 01/15/2011 - 02/15/2013

Total Par Accepted:* 1,340

Total Par Amt Submitted:* 8,741



Operation - RESULTS

Operation Date: 04/23/2007

Operation: Coupon Purchase

Settlement Date: 04/24/2007

Maturity/Call Date Range: 05/31/2007 - 05/15/2008

Total Par Accepted:* 1,781

Total Par Amt Submitted:* 19,638



Operation - RESULTS

Operation Date: 04/18/2007

Operation: TIPS Purchase

Settlement Date: 04/19/2007

Maturity/Call Date Range: 01/15/2008 - 04/15/2032

Total Par Accepted:* 560

Total Par Amt Submitted:* 6,159



Operation - RESULTS

Operation Date: 04/10/2007

Operation: Coupon Purchase

Settlement Date: 04/11/2007

Maturity/Call Date Range: 11/15/2015 - 11/15/2021

Total Par Accepted:* 835

Total Par Amt Submitted:* 10,492



Operation - RESULTS

Operation Date: 04/09/2007

Operation: Coupon Purchase

Settlement Date: 04/10/2007

Maturity/Call Date Range: 08/15/2011 - 08/15/2015

Total Par Accepted:* 1,011

Total Par Amt Submitted:* 10,149



Operation - RESULTS

Operation Date: 02/26/2007

Operation: Coupon Purchase

Settlement Date: 02/27/2007

Maturity/Call Date Range: 11/30/2007 - 06/30/2008

Total Par Accepted:* 1,878

Total Par Amt Submitted:* 10,809



In the above, the letter "C" following security description denotes that the security is callable.

[flow5]

The evidence of inflation is represented by "actual" prices in the marketplace. The "administered" prices would not be the "asked" prices, were they not “validated” by (MVt), i.e., “validated” by the world's Central Banks

Inflation is always and everywhere a monetary phenomenon.
—Milton Friedman, 1963.




The cyclical dislocations inherent in any boom/bust were present in exaggerated form during the housing crisis (increased risk taking, proliferation of financial innovation, etc).

Consumer's, Businesses’, & government's indebtedness do have limits. But the constraints imposed on income during the Great-Recession were obviously due to a contractionary monetary policy (MVt=PT).

The 24 month roc in RRs = the proxy for inflation (i.e., substitute housing). Housing prices peaked coterminous with the peak in the roc in MVt. Housing prices didn't need to be pushed higher, but housing prices required “validation” if appraisals weren’t to fall. Falling real-estate prices undermined the mortgage market (loan-to-value ratios, fair value accounting -MTM, etc.). Falling prices incentivized defaults & made prior commitments questionable (forced credit ratings lower), etc.

Roc’s in MVt are controlled by monetary authorities, not by consumer’s & business’s balance sheets. The aggregate size of the banking system, & the volume of earning assets held by the banking system-given the opportunities to make “bankable” loans – is determined by the willingness of the Federal Reserve to supply legal reserves to the banking system (i.e., prior to the introduction of the IOeR policy in Oct 2008).

And the 3 day, $ 38 billion dollar, temporary repo injections were untimely & insufficient (inadequate to forestall the approaching economic collapse). They did not reverse the 2 year trend (didn’t alter the negative roc’s in RRs). I.e., there should have been permanent injections – not temporary ones. It was a policy blunder to assume that the “heightening of perceived risks” would end when the "trading desk" returned the Treasuries to the primary dealers (within 1 to 15 days).

Temporary repurchase agreements: $12b on 8/9/07 for 14 days, $12b on 8/9/07 for 1 day, $19b on 8/10/07 for 3 days, $16b on 8/10/07 for 3 days. $3b on 8/10/07 for 3 days (reserve balances on Fridays count as 3 days). 87% were agency or MBS collateral.

And reductions in the effective federal funds rate (or a compression in spreads) are meaningless (they are not indicative of greater ease or restraint).



There were only 7 permanent OMOs in 2007 all before 5/3/07.  And all collateral consisited of Treasury securities totaling $8.8b