Saturday, September 1, 2007

The Look of Fear

Here's a chart I've created to show what fear looks like. This is the difference in yield between the three month treasury and the six month treasury bill. On August 20, 2007, the spread between the three month treasury bill and the six month treasury bill exceeded 1%. That's just not rational unless something is seriously breaking down.

So let's go back to see what caused it and what we can expect in the future. I didn't have my blog up and running back then but I suppose it is better late than never.

Panic eases, credit woes persist
The Fed took a dramatic step to combat the squeeze on liquidity last week. When banks became unwilling to lend funds, even to creditworthy investors, the Fed cut its discount rate by half a percentage point to 5.75 percent and extended its loan period to 30 days, from one day previously.


Risky subprime mortgages and the complex securities they have been packaged into have been at the heart of the current crisis sweeping Wall Street. As default rates on home loans have risen in the United States, the value of these securities took a big hit, and the shock waves quickly spread through the global credit markets, triggering a massive repricing of risk around the world.

The dislocation in the markets occurring now that investors are demanding higher returns for putting their money at risk will continue, analysts say - meaning money will remain hard to come by for certain borrowers.

I'd have a hard time arguing with any of that. Further, I do not think it bodes well for our bubbly housing market. Can you sense the problem? Subprime mortgages had problems. The reaction was to shun mortgages in general. That's a feedback loop. It creates more subprime problems, which creates more shunning, and so on, and so on.

Is it any wonder both Bush and Bernanke are out trying to calm the markets? Interesting times ahead.

Just my opinions of course.

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