The September 2007 50 bps rate cut was not actually the Fed’s first panic move; and I mean panic both in the sense that the global system was about to do that, as well as how policymakers were feeling in always being behind the times. Almost a month before, a little over a week after the system broke on August 9, on August 17, 2007, the FOMC reached into its “toolkit” for the first time by reducing the Primary Credit rate (what used to be called the Discount Rate).
What has followed from that initial move has been one failure after another (after another, after another, after another). Following the rate cut in September (stocks soaring like it was Christmas), there were more to follow as well as entirely new things like December 2007’s introduction of the Term Auction Facility (TAF) and dollar swaps (why were foreign banks begging their local central banks for US$ funding?)
I’ve written about this list before, so I’ll just republish the rest here:
Less than three months later, Bear Stearns failed not from losses, directly, but illiquidity. To that period, the FOMC added more TAF, introduced the TSLF (allowing institutions to switch “toxic waste” MBS collateral for SOMA-held UST’s) and then the PDCF which the Fed described(s) as, “The PDCF functioned as an overnight loan facility for primary dealers, similar to the way the Federal Reserve’s discount window provides a backup source of funding to depository institutions.” The federal funds target rate had been brought down to 2% by the end of April while LIBOR continued to an “unnatural” premium and spread…
To which the Federal Reserve responded with simply more failure and then still more, etc.: in addition to several “cold fusions” apart from Lehman, the Fed undertook AIG’s illiquidness to its (illegal) Maiden Lane SIV’s, added some $50 billion in reverse repos and worked out with the Treasury Dept. the logistics of the Supplementary Financing Account (which turned, essentially, short-term treasury borrowings into an increase in US government securities in addition to SOMA holdings that could be “loaned” out as repo collateral). On September 18,  the dollar swaps with the same central banks plus now the Bank of Japan were increased by $180 billion, and then six days later $30 billion more to another four central banks (the Reserve Bank of Australia, the Danmarks Nationalbank, the Norges Bank, and the Sveriges Riksbank). Then came the AMLF to bring the Discount Window (prior version) to commercial paper and money market funds (which is why it was also known as the ABCP MMMFLF) and ultimately the political argument about TARP, which the Fed supported in any incarnation.
Early October 2008 saw instead desperate, widespread liquidations and panic despite all the letters and acronyms; failure, failure, more failure.
The FOMC went back to work with the CPFF on October 27, the TALF on November 25, 2008, and in between still more dollar swaps (almost $600 billion at the worst) with more central banks (Brazil, Mexico, Korea, Singapore – as if the “dollar” problems were spreading rather than finding resolution via the Fed’s “printing press”). These continued escalations in monetary countermeasures occurred now with only worsening indications even though there had already been panic. On October 23, 2008, swaps spreads in the 30-year maturity went negative for the first time and caused no end in confusion and fear, both signaling and becoming still further illiquidity.
Also on November 25, 2008, the first of the QE’s was announced with $100 billion in direct purchase of agency paper and another $500 billion scheduled for MBS; then ZIRP on December 16, 2008.
The markets responded to all this massive “money printing” with still another wave of liquidations in early 2009, lasting into March, along with more acute fear of further bank nationalizations in Europe, especially the UK, predicated on “dollar” funding failure, failure and more failure.
The rest, as they say, has been history.
The Federal Reserve itself would follow the crisis with three additional QE’s because, why not? If the first one didn’t do the trick, maybe, just maybe you get lucky on any one of the next three or so.
Other central banks around the world added even more tools to their response; NIRP regimes, expanded purchase lists, Japan most of all, unto which we are now told central banks don’t have enough tools.
Janet Yellen was over in Hong Kong a few days ago, presumably making this statement with a straight face.
We generally look to be in a low short rate environment for unfortunately as far as the eye can see. If it’s true that we’re in that type of environment for quite a long time to come, we do have to worry that central banks are not going to easily have the tools to adequately respond.
Huh? You use and create any number of tools, fourteen by my unofficial catalog written above, during the impossible, unexpected 2008 crisis and after failing to stem that crisis and allowing the system to suffer the fallout from it, you then complain about not having enough tools?
Worse, what she is unintentionally admitting is that because those prior tools failed and now the whole world is stuck in a low interest rate environment central banks now need more tools just when things grow uncertain again. And here I thought the ECB’s NIRP fiasco was the stupidest thing I’d discover today.
Except, the above wasn’t even the dumbest thing Yellen said.
The euro area and Japan have inflation that’s still well below their 2 percent targets and no room at all to cut short rates and large balance sheets because they’ve done a lot of asset purchases.
Again, huh? We did all this really powerful stimulus and now because we did all that powerful stimulus we have no room to do more powerful stimulus now that it appears we really, really need it. Unexpectedly.
Even if that was true, it’s a stunning piece of tortured thinking. It has to be intentionally obtuse, otherwise we are left to consider Janet Yellen a stark-raving lunatic. She’s not.
Once again, her contention is easily disproved by reality. Interest rates are low because nothing these people have done amounts to “stimulus.” It is, in fact, the very failure of all those tools which is why they are screaming for more. And it is for that very same reason bond markets are on fire. Again.