Tuesday, December 11, 2007

Only one Fed member dissents

Eric S. Rosengren, the newest member of the Fed was the only one who voted to cut 50 basis points. At least he "gets" it. Here's highlights from a speech he gave October 10:

The recent problems in financial and credit markets reflect a pulling back from what I would call “surrogate securitization,” whereby investors were willing to buy debt that had been assigned high credit ratings by the credit rating agencies, regardless of the underlying assets used in the securitization. In other words, investors basically delegated due diligence to the rating agencies....

...Why should this concern not just central bankers, but all of us? Because disruptions in the ability to securitize assets have the potential to affect a much broader set of assets than just subprime loans, and increase the cost and reduce the availability of credit that consumers and businesses rely on...

...Consider something which may not be a “household term” to the layperson, the London Inter-Bank Offer Rate or LIBOR, which involves short-term borrowing of dollars by banks in Europe. One-month and three-month LIBOR remain very elevated and – here’s the rub – this tightens credit for a variety of U.S. borrowers, since many loans to businesses and many floating rate mortgages are tied to the LIBOR rate...


It's the TED spread that is giving the market fits. Look at three month treasury and three month euro-dollar futures. It's exorbitant! Why the spread? T-bills are risk free, while eurodollars reflect the risk of corporate borrowers. And these spreads continue to widen. So the Fed should have cut the discount rate further.

And they didn't.

But at least on Fed member gets it.

The Fed didn't throw the bears a bone, they threw them a steak.

The bears better eat it before it spoils.