Years of Poems and Spirits

Just read an article (”Markets Crisis tests Resolve of Fed, Officials”) on yesterday’s WSJ by Greg Ip, Deborah Solomon and David Wessel on recent market volatility.

I remember Karma recommended Ip during our econ class and I have been following him closely ever since. I really enjoyed reading this article: well balanced view on the possible causes/variables of short-term market behavior and non-sensational comments on Fed’s possible moves. Together with a side article “How Does the Fed Inject Money into The Economy? A Primer” this is really a very informative piece of work.

Some of the points these two articles touched upon:
1. Ben Bernanke’s academic interests in the relationship between financial markets and the rest of the economy
2. The difference between a rate cut and a “repo” intervention
3. The prospect of a Sept. 18 rate cut: largely depends on whether the credit crunch will be contained before then
4. The comparison between now and 1998 (after Russia defaulted). The spread between Treasury securities with different (perceived) liquidity as an indicator of risk.
5. The Fed encourages dealers using MBS as repo collaterals in order to save Treasury
6. The President’s Working Group on Financial Markets: their high level of alertness vs. the publicly nonchalant officials
7. For Douglas McArthur, it is “duty, honor, country”. For mandarins in the Fed, it is “growth, inflation and financial stability”.

On a related but separate note: Dow tumbled again today (8/15), down below 13,000. It is just so interesting to see WSJ reports are full of hints of an expected rate cut: “Many market watchers now believe a Fed cut will come later this year, and some – mostly those most closely tied to equities – think there will be an “emergency” cut before the Fed’s September meeting. ” or “Inflation is not the beast”. But NYT is equally adamant about NOT cutting rates: “Though the latest economic readings indicate that growth is steady, they also make a rate cut by the Federal Reserve less likely. ”

Remember Ip in his article mentioned something called “Greenspan put“, referring to Greenspan’s willingness to cover losses from risky investments. Apparently, NYT bought a different type of option.