Fed finally reacts - the Global Credit Crunch Timeline
This morning the Fed finally reacts to a most turbulent week of market activity and dropped the discount rate 1/2 point. Here's the domino effect that preceded the rate cut:
April 2 - Subprime crisis takes down first major lender - New Century files for bankruptcy
June 21 - First sign of widespread credit crunch - Wall Street hedge funds hit hard... Bear Stearns hedge funds near collapse
July 19 - Dow closes at all time record high 14,000 - Fed says subprime crisis still contained
July 27 - Credit squeeze spreading to higher grades of debt - Dow drops 520 in two days - Corporate debt dressed up, nowhere to go
August 2 - Alt-A loans now suspect - American Home Mortgage shuts down
August 9 - Global markets start crashing together - France's BNP Paribas and Countrywide, largest US lender unexpectedly send out warning signals begetting investor paranoia about other hedge funds with subprime holdings
August 10 - No buyers for commercial paper - Central Banks start pumping funds into repo markets for the first time since Sept 11, 2001
August 13-15 - Everything falls apart - no more buyers in the global debt markets
August 16 - Asia gets hit hard by unraveling of the Yen Carry trades ... Japan's Nikkei index plunges 5.4% - Yen carry trade unraveling fast
August 16 - Countrywide taps credit line and bankruptcy rumors fly
August 16 - Market comes back from a 300+ point DJIA fall - foreshadowing today's rate cut.
The debt markets were in a rout that was adversely affecting the stock market, and the economy. The Fed seemingly could ignore the domestic pressure to cut rates, but once it became a global economic threat extending to the yen carry trades, it was forced to act... just to appease the world.
The Fed didn't want to give away its hand on the cut this week, and its sudden decision to drop the discount rate was unexpected, catching short sellers offguard. Two days ago, St Louis Fed President William Poole prominently stated that the Fed shouldn't consider a rate cut before its next Sept 18 meeting (Bloomberg today disclosed Poole had to pretend today's rate cut wasn't happening
)The cut met with mixed reviews... the general conclusion being it was a confidence building gesture that lubricated debt market function, but it doesn't really solve the suddenly exposed global credit problems.
Related articles:
Explaining the Global Credit Crunch
Why the stock markets keep falling
Technorati Tags: Fed, subprime, debt markets, discount rate, hedge funds, commercial paper
We are experiencing the beginning actions of the market mop-up, starting with the leader Countrywide. See the post at www.REALonomics.net, entitled "Applauding Countrywide."
A number of collective counter-measures will be in place during the next 30-90 days and the Federal Reserves actions to cut the rate were just the beginning.
Mortgage lenders will now need to find constructive lending methodologies that do not harm good borrows.
Let's see what happens next week.
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