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Time To Warm Up The Helicopters?

by: Barry Ritholtz August 12, 2007    
Barry Ritholtz

Barry Ritholtz

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A few items worth passing along: The "contained" housing slowdown, and the "contained" subprime issue have now blown up hedge funds in the US, Australia, England, Germany, and France. Deals for funding, stocks buybacks are now getting hit, as funding dries up for KKR (KKR), Home Depot (HD), Cerebus/Chrysler, etc.

The SEC is combing the books of Merrill Lynch (MER) and Goldman Sachs (GS), looking to see how accurately the CDOs are priced on their books.
ecb
Speaking of intervention, the ECB got the choppers out Thursday, airdropping 94.8 billion in Euros onto the continent. The Federal Reserve announced it's "providing liquidity to facilitate the orderly functioning of financial markets."

Overnight, the Fed Funds Rate had spiked towards 6%, and now after the 2 liquidity injections, is back to the 5.25% overnight lending rate that is the Fed's target. Rumor has it that the recent ECB & U.S. Fed injections are now bigger than GDP of Argentina!


~~~

A survey from the WSJ found almost half -- 44% -- of respondents want a rate cut (So much for free market economics!).

Rescue_me

Are people truly that naive? Do they not understand what rate cuts will do to the U.S. dollar?

Then there is the concept of Moral Hazard. I am in the camp of William Poole, who has stated that speculators in these markets need to absorb their losses themselves. A rate cut that causes inflation is essentially a "cruelest tax increase."


Sources:
Fed Issues Statement as It Moves To Reassure Jittery Markets
DAVID WESSEL, JOELLEN PERRY, MONICA HOUSTON-WAESCH AND GREG IP
WSJ, August 10, 2007 11:10 a.m.
http://online.wsj.com/article/SB118673195378094167.html

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This article has 8 comments:

  •  
    Aug 12 09:28 AM
    Barry speaks truth. Let the fatcats that got their pockets full from the ARM shell game pay themselves out. The only problem with that though is that the little people associated with CountryWide, et al, will be the ones hurt. The slime balls have already sheltered their fortunes.
    Reply
  •  
    Aug 12 02:42 PM
    A rate cut will only encourage more speculation and create another problem while only delaying the fall out from this one. That said, I think we are going to see a cut although earlier I didn't think so. Wall St wants a bail out because the "Crowd" is in deep and they've got the clout. My guess is that the Fed got it's instructions from the political apparatus, the friends of those who are hurting now. A cut will definitely raise the value of the portfolios loaded with sub prime mortgages. Vic
    Reply
  •  
    Aug 12 03:34 PM
    I'll second that one Vic - the more conditioned everyone gets to the Fed cutting rates for a cheap liquidity bailout whenever there is trouble, the more speculative the markets will become. Do we really need or want risk premiums to be made even thinner?

    Hopefully Bernanke draws the line on not just rates, but his integrity and credibility too...
    Reply
  •  
    Aug 12 02:57 PM
    Great video Barry... and the Wagnerian music... suits the situation just fine...
    Reply
  •  
    Aug 12 04:09 PM
    I LUV THIS SCREW THE RICH ATTITUDE. IT WASNT TO LONG AGO (HOURS) THAT ALL YOU NOOBS WANTED TO BE ONE. LOL ! REST ASSURED THAT WE ALL WILL BE POOR TOGETHER SOON. SEE YOU ALL AT WALMART! THE QUESTION OF THE DOLLAR IS A JOKE. IF MOST OF CENTRALS ARE INFLATING TOGETHER , WE CAN TAKE THAT LOWERING THE RATE CHANCE PEPS. WHAT IS THE DARN DIFF, LYING ABOUT 6% INFLATION OR FIBBING ABOUT 12% FUTURE INFLATION. HIGHER GROWTH HAS GOT TO BE THE ANSWER, HYPERINFLATION BE DAMNED. LIKE IT MAKES MUCH DIFF HOW BIG A BUBBLE WE HAVE, EVERYBODY JUST GOT TO KEEP BLOWING AND BLOWING ............
    Reply
  •  
    Aug 12 04:09 PM
    I LUV THIS SCREW THE RICH ATTITUDE. IT WASNT TO LONG AGO (HOURS) THAT ALL YOU NOOBS WANTED TO BE ONE. LOL ! REST ASSURED THAT WE ALL WILL BE POOR TOGETHER SOON. SEE YOU ALL AT WALMART! THE QUESTION OF THE DOLLAR IS A JOKE. IF MOST OF CENTRALS ARE INFLATING TOGETHER , WE CAN TAKE THAT LOWERING THE RATE CHANCE PEPS. WHAT IS THE DARN DIFF, LYING ABOUT 6% INFLATION OR FIBBING ABOUT 12% FUTURE INFLATION. HIGHER GROWTH HAS GOT TO BE THE ANSWER, HYPERINFLATION BE DAMNED. LIKE IT MAKES MUCH DIFF HOW BIG A BUBBLE WE HAVE, EVERYBODY JUST GOT TO KEEP BLOWING AND BLOWING ............
    Reply
  •  
    Aug 12 04:19 PM
    Now I now we're near the bottom when you start showing clips of "Apocalypse Now".

    I don't want to bail out the speculators with a rate cut. I also don't want a further plunge in the US$ since it will spur inflation. BUT with short and long term interest rates trading well below the Fed Funds rate already, are we really fooling the world by keeping the Fed Funds rate at 5.25% - or are world currency traders reacting to real interest rates in this country? I say the latter; and that a small rate cut doesn't matter.
    Reply
  •  
    Aug 13 01:21 AM
    I love the smell of napalm in the morning. J Warren
    Reply
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