Tuesday, November 27, 2007

Price Discovery and Confusion (Musical Tribute)

Economic Outlook and Central Bank Policy
It is important to recognize that the Federal Reserve cannot resolve this price discovery problem. The markets will have to figure this out. Arbitrarily lowering interest rates or providing liquidity to the market does not provide the answers the market seeks. Indeed, in some circumstances, lowering interest rates may prolong the painful process of price discovery.

It is also important to recognize that the Federal Reserve helped initiate the price discovery problem by sending interest rates to hideously low levels and then encouraging the use of exotic mortgages.

American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage. - Alan Greenspan, 2004 (as seen in the link below)

The problem became most acute for those institutions or entities that relied on borrowing short and lending long (especially if lending long meant buying subprime mortgage portfolios).

That's exactly what the Fed's intent was when they lowered short-term interest rates! Here, borrow some cheap short-term money and quickly loan it out!! Help us stop the deflation!!!

Too bad banks didn't heed Buffett's warnings about being a short-term borrower or a long-term lender. They had 25 years to think about them.

Overall, we opt for Polonius (slightly restated): “Neither a short-term borrower nor a long-term lender be.” - Warren Buffett, Shareholder Letter, 1979 (as seen in the link below)

So here's a musical tribute from ELO's "Discovery" album aptly named "Confusion."

See Also:
Remarks by Chairman Alan Greenspan
Warren Buffett on 1970's Inflation

No comments: