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Time to Warm Up The Helicopters?

Posted By Barry Ritholtz On August 10, 2007 @ 11:29 am In Credit,Derivatives,Federal Reserve,Psychology | Comments Disabled

Ecb_ [1]
A few items worth passing along this morning: The "contained" housing slowdown, and the  "contained" subprime issue [2] have now blown up hedge funds in the US [3], Australia [4], England [5], Germany [6], and France [7].

Deals for funding [8], stocks buybacks are now getting hit, as funding dries up for KKR, Home Depot [9], Cerebus/Chrysler, etc. The SEC is combing the books of Merrill Lynch and Goldman Sachs, looking to see how accurately the CDOs are priced on their books [10].

Speaking of intervention, the ECB got the choppers out yesterday, airdropping 94.8 billion in Euros onto the continent. The Federal Reserve announced [11] they are "providing liquidity to facilitate the orderly functioning of financial markets."

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

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A survey from the WSJ [12] found almost half — 44% — of respondents want a rate cut.  (So much for free market economics!)

Rescue_me [12] 

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

Then there is the concept of Moral Hazard [13]. I am int he 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."

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Sources:
Fed Issues Statement as It Moves To Reassure Jittery Markets [14]   
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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URL to article: http://www.ritholtz.com/blog/2007/08/time-to-warm-up-the-helicopters/

URLs in this post:

[1] Image: http://bigpicture.typepad.com/photos/uncategorized/2007/08/10/ecb_.jpg

[2] subprime issue: http://online.wsj.com/article/SB118664884606092848.html?mod=hps_us_whats_news

[3] US: http://www.forbes.com/markets/commodities/2007/08/09/goldman-sachs-alpha-markets-equity-cx_er_0809markets07.html

[4] Australia: http://www.bloomberg.com/apps/news?pid=20601081&sid=aZMhEKAlAAxg&refer=australia

[5] England: http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article2198037.ece

[6] Germany: http://www.bloomberg.com/apps/news?pid=20601087&sid=aUAcRJopf57c&refer=home

[7] France: http://www.marketwatch.com/news/story/bnp-suspends-fund-valuations-amid/story.aspx?guid=%7BE6B2639B%2D407F%2D4383%2DA6EC%2D48872DA48B08%7D

[8] Deals for funding: http://www.bloomberg.com/apps/news?pid=20601102&sid=a7Xu2dTqmHd0&refer=uk

[9] Home Depot: http://www.businessweek.com/bwdaily/dnflash/content/aug2007/db2007089_684681.htm?chan=top+news_top+news+index_businessweek+exclusives

[10] the CDOs are priced on their books: http://online.wsj.com/article/SB118671258265093971.html

[11] Federal Reserve announced: http://federalreserve.gov/boarddocs/press/monetary/2007/20070810/default.htm

[12] survey from the WSJ: http://forums.wsj.com/viewtopic.php?t=690&autoredirect=true&sid=05ffcbeda06ce6e5c11cba7981deb554

[13] Moral Hazard: http://en.wikipedia.org/wiki/Moral_hazard

[14] Fed Issues Statement as It Moves To Reassure Jittery Markets: http://online.wsj.com/article/SB118673195378094167.html

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