Bernanke caused the Great-Recession all by himself II

[flow5]

Can't post on first thread...

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 the lender's & investor's 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 (54 vs. 62).
 
There were only 7 permanent OMOs in 2007 (all before 5/3/07). And all collateral consisted of Treasury securities totaling $8.8b

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

See: bit.ly/yUdRIZ

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

93%-96% of all bank debits clear thru these transaction based accounts.

[flow5]

Prima facie evidence that the Reserve banks & the commercial banks have created credit, as with all bank credit creation, is an expansion in the money stock. Prima facie evidence that the money stock (transaction based accounts) has expanded, is given by the rate-of-change in legal (required) reserves (the base).

So long as the 24 month roc in RRs (proxy for inflation) is no more than 2-3 percentage points above the 10 month roc in RRs (proxy for real-output), inflation is otherwise quiescent (i.e., for the last 100 years anyway).

[flow5]

Prices dropped & illiquidity & insolvency increased:

"In many cases, the long-term assets purchased were mortgage-backed securities, sometimes called "toxic assets" or "legacy assets" in the press. These assets declined significantly in value as housing prices declined and foreclosures increased during 2007-2009"

"Therefore, during periods of market illiquidity, they could go bankrupt if unable to refinance their short-term liabilities. They were also highly leveraged. This meant that disruptions in credit markets would make them subject to rapid deleveraging, meaning they would have to pay off their debts by selling their long-term assets. A sell off of assets could cause further price declines of those assets and further losses and selloffs"-

"The securitization markets frequently tapped by the shadow banking system started to close down in the spring of 2007, with the first failure of auction-rate offerings to attract bids. As excesses associated with the U.S. housing bubble became widely understood and borrower default rates rose, residential mortgage-backed securities (RMBS) deflated. Tranched collateralized debt obligations (CDOs) lost value as default rates increased beyond the levels projected by their associated agency credit ratings"

"Commercial mortgage-backed securities suffered from association and from a general decline in economic activity, and the entire complex nearly shut down in the fall of 2008. More than a third of the private credit markets thus became unavailable as a source of fund. In February 2009, Ben Bernanke stated that securitization markets remained effectively shut, with the exception of conforming mortgages, which could be sold to Fannie Mae and Freddie Mac"

"U.S. Treasury Secretary Timothy Geithner has stated that the 'combined effect of these factors was a financial system vulnerable to self-reinforcing asset price and credit cycles' "

[flow5]

Dr. Scott Sumner (Money-illusion):

"the “Ben Bernanke criterion” for judging the stance of monetary policy makes it very clear that the Great Recession was caused by tight money"

Bernanke from 2003:

"The imperfect reliability of money growth as an indicator of monetary policy is unfortunate, because we don’t really have anything satisfactory to replace it. As emphasized by Friedman . . . nominal interest rates are not good indicators of the stance of policy . . . The real short-term interest rate . . . is also imperfect . . . Ultimately, it appears, one can check to see if an economy has a stable monetary background only by looking at macroeconomic indicators such as nominal GDP growth and inflation"

[Aman A.K.A. Ahamburger]

LOL... Flow, start all the new threads about it you want, the fact that you think the USA had "tight" monetary policies before the crash tells me all I need to know.  Everyone and their dog knows that EVERYBODY was getting loans for homes.  You didn't even need to prove your income in certain cases and these were almost exclusivity adjustable rate mortgages.  People started to default on these loans and the money started to flow out of MBS, the consumer lost faith in the highly leveraged and securitized USA housing market, and the rest is history.  LOOSE monetary policies is what caused the Great Recession, but hey, thanks to our Jewish friends you are free to think what you want.

You want to see examples of tight monetary policy? Look at what Flaherty and Carney did here in Canada over the last year.  You guys tried to solve your housing bubble by letting even more people get into the market to try to keep pushing it up, this is NOT tight monetary policy, thanks though, I always enjoy a good laugh in the morning.  I will have to remember the one about the USA having TIGHT monetary policies causing the Great Recession...