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Fearful
ParticipantLike many of us, I was contemplating buying foreclosures, but then I realized I would be taking on substantial inventory risk. Buying foreclosures on the downward slope is a nice way to make a small fortune out of a big one. Successful foreclosure investors buy near the bottom, which is not until everyone has given up on real estate as an investment.
August 12, 2007 at 7:52 PM in reply to: Can someone explain to me what the FED did this week? #74014ParticipantThe Fed’s actions do not have a permanent effect on the money supply – that is, they result in a blip up which could be sustained, but we hope won’t be, because (as I understand) the supply increase was about 7%.
The faster that money moves around, the more efficient the system. The downside of fast moving money is that the system is sensitive to abrupt throttling, such as happens when a bunch of mortgagees stop paying their monthly bills. In a highly interconnected system – that is, with securitized mortgages – the effects of that throttling are felt far beyond the normal recipient of the mortgage payments. Stopping the money moving in one point means it has to stop moving in a bunch of other, related, areas. This is a liquidity crisis: It is fine when money stops moving slowly, but bad when it suddenly stops moving: You see things like jumbo mortgages at 8%, and funding for leveraged deals simply not being made available.
The Fed stepped in to flood the system with money in hopes that over the intervening days money can be pulled in from other areas to alleviate the crisis. This is the “stay of execution” you refer to. If the increase in the money supply is short-lived, the inflationary effect will be minimal.
The performance of the credit markets on Monday will tell us how effective the money bombing was.
The breadth of this issue illustrates just how bad the housing bubble actually is.
August 12, 2007 at 7:52 PM in reply to: Can someone explain to me what the FED did this week? #74133ParticipantThe Fed’s actions do not have a permanent effect on the money supply – that is, they result in a blip up which could be sustained, but we hope won’t be, because (as I understand) the supply increase was about 7%.
The faster that money moves around, the more efficient the system. The downside of fast moving money is that the system is sensitive to abrupt throttling, such as happens when a bunch of mortgagees stop paying their monthly bills. In a highly interconnected system – that is, with securitized mortgages – the effects of that throttling are felt far beyond the normal recipient of the mortgage payments. Stopping the money moving in one point means it has to stop moving in a bunch of other, related, areas. This is a liquidity crisis: It is fine when money stops moving slowly, but bad when it suddenly stops moving: You see things like jumbo mortgages at 8%, and funding for leveraged deals simply not being made available.
The Fed stepped in to flood the system with money in hopes that over the intervening days money can be pulled in from other areas to alleviate the crisis. This is the “stay of execution” you refer to. If the increase in the money supply is short-lived, the inflationary effect will be minimal.
The performance of the credit markets on Monday will tell us how effective the money bombing was.
The breadth of this issue illustrates just how bad the housing bubble actually is.
August 12, 2007 at 7:52 PM in reply to: Can someone explain to me what the FED did this week? #74140ParticipantThe Fed’s actions do not have a permanent effect on the money supply – that is, they result in a blip up which could be sustained, but we hope won’t be, because (as I understand) the supply increase was about 7%.
The faster that money moves around, the more efficient the system. The downside of fast moving money is that the system is sensitive to abrupt throttling, such as happens when a bunch of mortgagees stop paying their monthly bills. In a highly interconnected system – that is, with securitized mortgages – the effects of that throttling are felt far beyond the normal recipient of the mortgage payments. Stopping the money moving in one point means it has to stop moving in a bunch of other, related, areas. This is a liquidity crisis: It is fine when money stops moving slowly, but bad when it suddenly stops moving: You see things like jumbo mortgages at 8%, and funding for leveraged deals simply not being made available.
The Fed stepped in to flood the system with money in hopes that over the intervening days money can be pulled in from other areas to alleviate the crisis. This is the “stay of execution” you refer to. If the increase in the money supply is short-lived, the inflationary effect will be minimal.
The performance of the credit markets on Monday will tell us how effective the money bombing was.
The breadth of this issue illustrates just how bad the housing bubble actually is.
ParticipantDave, my thinking exactly. The poor guy just asked a simple question about macroeconomics, and a bunch of survivalists are yelling about stocking up on food and water.
By the way, you are exactly right that predictability is more important than the presence or absence of inflation itself.
ParticipantDave, my thinking exactly. The poor guy just asked a simple question about macroeconomics, and a bunch of survivalists are yelling about stocking up on food and water.
By the way, you are exactly right that predictability is more important than the presence or absence of inflation itself.
ParticipantDave, my thinking exactly. The poor guy just asked a simple question about macroeconomics, and a bunch of survivalists are yelling about stocking up on food and water.
By the way, you are exactly right that predictability is more important than the presence or absence of inflation itself.
ParticipantI am replying because I asked the exact same question in my macroeconomics class in business school. If the economy expands faster than population growth, that implies economic output per person is increasing, which means higher productivity, which means personal incomes are increasing.
The article you cite is a little misleading in that the Fed’s actions were not directly aimed at increasing economic output but rather to help ensure the financial system continues running by providing cash so obligations can be met.
However, this is a short term fix, as when the Fed does this, it increases the money supply; if this increase in the money supply is not reversed it results in inflation. More money correlated to the same economic output as before = inflation. Some argue that loose money got us into this mess in the first place.
The Fed cannot directly control the economy – that is, people still go to work and do the same jobs, whatever the Fed’s actions – but its influence on the money supply can affect the economy. Cynics would say, apparently only negatively.
Macroeconomics is fascinating stuff indeed.
ParticipantI am replying because I asked the exact same question in my macroeconomics class in business school. If the economy expands faster than population growth, that implies economic output per person is increasing, which means higher productivity, which means personal incomes are increasing.
The article you cite is a little misleading in that the Fed’s actions were not directly aimed at increasing economic output but rather to help ensure the financial system continues running by providing cash so obligations can be met.
However, this is a short term fix, as when the Fed does this, it increases the money supply; if this increase in the money supply is not reversed it results in inflation. More money correlated to the same economic output as before = inflation. Some argue that loose money got us into this mess in the first place.
The Fed cannot directly control the economy – that is, people still go to work and do the same jobs, whatever the Fed’s actions – but its influence on the money supply can affect the economy. Cynics would say, apparently only negatively.
Macroeconomics is fascinating stuff indeed.
ParticipantI am replying because I asked the exact same question in my macroeconomics class in business school. If the economy expands faster than population growth, that implies economic output per person is increasing, which means higher productivity, which means personal incomes are increasing.
The article you cite is a little misleading in that the Fed’s actions were not directly aimed at increasing economic output but rather to help ensure the financial system continues running by providing cash so obligations can be met.
However, this is a short term fix, as when the Fed does this, it increases the money supply; if this increase in the money supply is not reversed it results in inflation. More money correlated to the same economic output as before = inflation. Some argue that loose money got us into this mess in the first place.
The Fed cannot directly control the economy – that is, people still go to work and do the same jobs, whatever the Fed’s actions – but its influence on the money supply can affect the economy. Cynics would say, apparently only negatively.
Macroeconomics is fascinating stuff indeed.
ParticipantLOL – good post. Yes, indeed, the paint machine at Home Depot ought to flag colors the prevailing community standards would consider obscene.
ParticipantLOL – good post. Yes, indeed, the paint machine at Home Depot ought to flag colors the prevailing community standards would consider obscene.
ParticipantYou can also buy CDs from a fixed income trading desk. I bought mine through Schwab. I was able to get 5.15-5.2 in 1-2 year maturities, and spread the portfolio across different banks to get under the $100K FDIC limit. I think the rates are slightly lower than direct bank purchases, and certainly lower than teaser rates, but I did not have the stomach for a bunch of accounts all over the place.
ParticipantYou can also buy CDs from a fixed income trading desk. I bought mine through Schwab. I was able to get 5.15-5.2 in 1-2 year maturities, and spread the portfolio across different banks to get under the $100K FDIC limit. I think the rates are slightly lower than direct bank purchases, and certainly lower than teaser rates, but I did not have the stomach for a bunch of accounts all over the place.
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