I hate to continue beating a dead horse (except this horse is a Trojan Horse and will come to life again), but clearly the Fed knew it was putting the financial system at unacceptable risk in the housing bubble. I offer the three charts again, together this time, showing that the Fed saw all this coming.
I have said that I think it was a conspiracy, others may argue that the Fed was incompetent. But these are the brightest financial minds on the planet and I hardly think that incompetency was the issue! Besides the charts, there is more research provided here in trying to get to the bottom of this Commercial Paper fiasco, the real cause of financial instability, that regulators helped make happen!
These charts show what happened in late 2007. It was all happening at once, too obvious to ignore on the part of the Fed.
Chart 1:
Chart 2:
Chart 3:
I like the third chart because The GDP (NGDP) showed a little rebound until the middle of 2007. That corresponds to the crashing of the 10 year swap rate and rise of LIBOR in chart 2. It also corresponds to the decline of commercial paper in chart one.
So, we had these three events happening in mid 2007, and the Fed wasn’t concerned? Are you kidding me?
This was way before the money market run in September, 2008. It makes no sense that the Fed was so blind. As this Fed research paper shows, the residential real estate loans based on commercial paper went from 11.6 percent in 2006 to 4.8 percent in 2007! That is a massive crash.
And yet, that commercial paper crash in the link above doesn’t look as dreadful as the FRED chart 1. That is precipitous. It could be explained by shadow banking conduits, as shadow banking was the key to the crash of the CP market.
I point you to a Stanford study which is fascinating and worth looking at. The Stanford author, Bill Snyder, clearly views solving this issue as a riddle. Research goes off on a number of tangents and Stanford did exhaustive research trying to come up with the solution.
