New post, because that last one was so long (sorry)…
And while the Fed might not have “direct” regulatory control over certain markets, they have more of an effect on markets than almost any other entity in the U.S. If a Fed official, especially the chairman of the Fed, says that a particular asset is getting dangerously overpriced and that they will begin to take action to offset the misallocation of capital, trust me, the world will listen.
I’m sure you also understand that while they might not have “official” control in certain areas of finance, they definitely meet with and confer with other regulators behind closed doors. They have a lot more power than what is “officially” granted to them, and you know this.
And here are some charts to show the correlation between the Fed Funds Rate and other interest rates:
And something unrelated to this that I’ve always considered was the fact that the 30-Year Treasury was discontinued in 2002 and reintroduced in 2006. IMO, the possibility exists that investors who traditionally buy longer-term securities (like pension funds) were forced into larger positions in the mortgage market by this move. Just conjecture on my part, but I think it certainly didn’t help. Not the Fed, but just another issue to consider.
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And here’s a snippet about how pension funds were trying to juice their yields with various schemes sold to them by Wall Street. They did this because of the investment losses resulting from the dot-com/stock market crash, and because of the low yields on bonds at the very time that they needed higher yields to help make up for some of those earlier losses. One can even go further back and suggest that if Greenspan had sounded the alarm in full during the stock market bubble of the late 90s, as opposed to remarking about a little “froth,” much of the damage from that bubble could have been avoided as well.
Let’s not forget that the pension benefit enhancements during the stock market bubble has also contributed to the current underfunding in the pension plans. If not for the stock market bubble, I believe these enhancements would never have happened.
