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Care of Ritholtz's Big Picture Blog:
"As a result of all this government-sanctioned activity, total mortgage lending nationwide actually rose in the third quarter of 2007, according to Richard Iley, an economist at BNP Paribas. However, as he pointed out in a recent research note, simply increasing the volume of business was probably not the only goal. "It is no exaggeration to say that the mortgage market was effectively nationalized" in the third quarter, Iley wrote. "The F.H.L.B. acted as a forgiving lender of the last resort, providing the liquidity to sustain mortgage production while Fannie and Freddie acted as risk intermediaries of last resort with record purchases of mortgages."
http://www.portfolio.com/views/colum...nks?print=true
The size of this operation is suggested by Gillian Tett:
"Instead, the Fed found its liquidity operations bypassed as US commercial banks furtively accessed huge amounts of liquidity from the Federal Home Loan Banks. These wholesale government-sponsored bank co-operatives offered loans against housing-related collateral on an unprecedented scale, reaching an annualised rate of $750bn (£385bn, €517bn) during the third quarter of 2007, the last for which data is available."
From: http://www.ft.com/cms/s/0/5d533184-d...0779fd2ac.html
Many commentators have hammered away at investors' strange fixation with Fed operations and our unfounded faith that they are significant in size and effect. Hussman makes this point regularly, for example, here:
http://www.hussmanfunds.com/html/fedirrel.htm
Likewise, the deflationists continuously hammer at the point that the Fed cannot force banks to lend and consumers to borrow and therefore there will not be any inflationary bail out.
Both arguments seem valid if you assume that a) any reflation attempts will show up in Fed actions primarily if not exclusively and b) an examination of current Fed actions demonstrate that they are inadequate to the task of offsetting the massive deflationary force of falling home prices.
But what if there was a program that could effectively make it in the banks best interests to lend by waving a wand over bad assets and making the banks (somewhat) whole again? All those who point to recent Fed tightening might have proved is that the Fed is not that institution. Is the FHLB system that institution? I don't know, but 750 bln dollars is at least in the ballpark of the problem's size.
"As a result of all this government-sanctioned activity, total mortgage lending nationwide actually rose in the third quarter of 2007, according to Richard Iley, an economist at BNP Paribas. However, as he pointed out in a recent research note, simply increasing the volume of business was probably not the only goal. "It is no exaggeration to say that the mortgage market was effectively nationalized" in the third quarter, Iley wrote. "The F.H.L.B. acted as a forgiving lender of the last resort, providing the liquidity to sustain mortgage production while Fannie and Freddie acted as risk intermediaries of last resort with record purchases of mortgages."
http://www.portfolio.com/views/colum...nks?print=true
The size of this operation is suggested by Gillian Tett:
"Instead, the Fed found its liquidity operations bypassed as US commercial banks furtively accessed huge amounts of liquidity from the Federal Home Loan Banks. These wholesale government-sponsored bank co-operatives offered loans against housing-related collateral on an unprecedented scale, reaching an annualised rate of $750bn (£385bn, €517bn) during the third quarter of 2007, the last for which data is available."
From: http://www.ft.com/cms/s/0/5d533184-d...0779fd2ac.html
Many commentators have hammered away at investors' strange fixation with Fed operations and our unfounded faith that they are significant in size and effect. Hussman makes this point regularly, for example, here:
http://www.hussmanfunds.com/html/fedirrel.htm
Likewise, the deflationists continuously hammer at the point that the Fed cannot force banks to lend and consumers to borrow and therefore there will not be any inflationary bail out.
Both arguments seem valid if you assume that a) any reflation attempts will show up in Fed actions primarily if not exclusively and b) an examination of current Fed actions demonstrate that they are inadequate to the task of offsetting the massive deflationary force of falling home prices.
But what if there was a program that could effectively make it in the banks best interests to lend by waving a wand over bad assets and making the banks (somewhat) whole again? All those who point to recent Fed tightening might have proved is that the Fed is not that institution. Is the FHLB system that institution? I don't know, but 750 bln dollars is at least in the ballpark of the problem's size.
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