Quote of the Day: Liquidity Trap

Is the Fed out of bullets?  I wonder:

 "When an asset like real estate becomes overvalued, even if you drop interest rates to zero, you can’t force consumers to borrow more, because they’ve already borrowed too much. Nor can you force lenders to lend, because they’re already puking on ‘bad paper.’ It’s called a liquidity trap."

-Bob Campbell, San Diego Real Estate Timing
via Fleck

Even more proof ? Consider this article, variations of which have been in the media the past few days:  Fed Interest-Rate Cuts Fail to Lower Borrowing Costs:

"The Federal Reserve’s interest-rate
cuts last month have failed to lower borrowing costs for many
companies and households, increasing the chance of further
reductions from the central bank.

Companies are paying more to borrow now than before the Fed
reduced its benchmark rate by 1.25 percentage point over nine
days in January, based on data compiled by Merrill Lynch & Co.
Rates on so-called jumbo mortgages, those above $417,000, have
increased in the past month, making it tougher to sell
properties and risking further price declines."   

Bill King noted a similar story on ABC News:

"[Monday] night, the lead story on ABC evening news (World News) was ‘though the Fed has cut interest rates sharply in recent weeks, banks and credit card companies are hiking rates on consumers.’

Chase, Bank One and Bank of American were cited. The ABC News reporter said banks are hiking consumer interest rates and fees to cover losses on their crappy paper.

Yes, it’s that blatant and transparent.

Lovely. We get all of the wonderful inflationary effects of rate cuts — but none of the economic benefits.

Can you say "The Fed is pushing on a string?"
(Very good children. I knew you could)



Housing mess too big for a quick fix
Bill Fleckenstein
Contrarian Chronicles2/11/2008 12:01 AM ET

Fed Interest-Rate Cuts Fail to Lower Borrowing Costs
Scott Lanman
Bloomberg, Feb. 13, 2008

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What's been said:

Discussions found on the web:
  1. shoeless commented on Feb 14

    Let’s not forget that the banks still have $150bln in leveraged loans (floating) that they are forced to knock doen in price each time the fed cuts. 125bps in 10 days was no favor. Paper is soon to be marked at 85 cents…soon to be worth much less.

  2. Ross commented on Feb 14

    ” The Fed is pushing on a string ”

    ” The threads of misconclusions are woven into the fabric of our lives ”

  3. UrbanDigs commented on Feb 14

    I discussed this Barry yesterday:


    with all stimulus + rate cuts, here is what I see:

    a) corporate spreads WIDENING: IG & HY
    b) CDX Index shows this
    c) Failed auctions show liquidity strained; risk aversion
    d) CMBX indices cliff diving

    Even Yellen acknowledged that rate cuts were meant to ease spreads, and it has not worked. Only LIBOR eased as a result of targeted liquidity injections to banks.

  4. michael schumacher commented on Feb 14

    You now have one trading day left in the week and we’ve already thrown over $90 billion to the banks in T.A.F and repo’s



    Still think the housing problem is over??

    Guaranteed it goes over $100 billion by tomorrow.

    Contained my ass.

  5. Vermont Trader.. commented on Feb 14

    Wow, everything looks so worrisome today…

    Probably a good day for an afternoon short squeeze.

  6. UrbanDigs commented on Feb 14

    you know, the more I think about this, I just dont see how they will allow the bond insurers to purely get downgraded without some escape plan first.

    Some free market capitalist world we live in. Where is Kudlow when you need him. But he only likes free markets when it lets stocks go up. If it would mean stocks go down, he’s all for intervention.

    I agree that muni markets shouldnt be disrupted, but seriously, these insurers are not AAA, and its a complete farce that there is collusion to delay ratings being changed for a bailout to be setup first.

  7. scorpio commented on Feb 14

    all solutions involve taxpayer-funded government bailouts of Wall St fat-cats. i love it. heads i win, tails you lose. this is the best of all systems.

  8. michael schumacher commented on Feb 14

    how about downgrading the mono’s tomorrow after the close. That scenario is slowly setting itself up.

    Remember what happened that last time we had a holiday…..not saying we are going to free fall however with the short attention span that passes for fundamental analysis these days it will be totally forgotten by Tuesday.

    Seriously we have so many conflicts of interest just being allowed to occur I shudder to think what is in store for us when the machine can’t be counted on to prop up markets any longer. That they’ve managed it this long is a direct result of cheap easy money and absolutely no understanding of risk management. How anyone could willingly hand over money to a system that “never saw any of this coming” is just comical.

    Liquidity is not the real issue here…..
    Solvency is.


  9. Estragon commented on Feb 14

    Wow, we’re already at the pushing-on-a-string meme?

  10. UrbanDigs commented on Feb 14

    I agree with you MS..its why Im long SKF and EEV..but they CANT allow the markets to fall and correct themselves. They did after dot com bubble and I got killed because I believed the reports of the companies I bet on; and proven later that those reports were lies and revised.

    Damage done. I got no bailout though and learned the hard way with hundreds of thousands lost. But this time, its housing that is fueling and financial securities along the line of fire. We need to get wrecked and they are throwing anything they can think of to prevent this, and that is going to come back and haunt us

  11. Christopher Laudani commented on Feb 14


    The soultion is pretty easy. Simply force consumers to borrow more.

    Have the Federal gov’t send every American a check for $90,000 (each Americans share of the national debt). Then each month bill them $568/month (6.5% @30 yrs) to pay it back.

    Americans would spend the $90,000 on all sorts of things, boats, cars, you name it. It would give the economy a huge boost.

    Some people would recogonize their responsibility and pay back their gov’t grant….errr…I mean loan.

    Unfortunately, others wouldn’t. We’d throw those people in jail or a work house after a year of non-payment. (We’d have to build a whole chain of debtors prisions and work houses to accomodate a few million Americans.) Heck, we could fence off Rhode Island and ship them in. Let those debtors fend for themselves.

    As for the the loans that aren’t paid back, but still on the books, we simply transfer them to the Social Security Trust fund as an asset for future generations to collect. (In the future, we will have new technology that will allow us to collect from those deadbeats trapped in New Rhode Island.)

    Since time is of the essence, I will present my plan to the President by the end of the month.

  12. Ross commented on Feb 14

    What MS said. 12:25. It IS a solvency problem. What’s on YOUR balance sheet?

    If I kept my books like the banks and the Gov. I’d be in prison!

  13. deflator mouse commented on Feb 14

    CL said:
    “(We’d have to build a whole chain of debtors prisions and work houses to accomodate a few million Americans.) Heck, we could fence off Rhode Island and ship them in.”

    Forget RI. You misunderestimate human nature. We’d better start fencing off Texas.

    Oh wait….

  14. Moe Gamble commented on Feb 14

    lol, and I was still laughing about “No soup for you!”

  15. michael schumacher commented on Feb 14

    we are just slowly paying for the bullshit intervention that allowed us to “rally” off of October lows in 2002.

    In reality we never should have come out of the problems of the .com bust. But cheap easy money solves all until it can’t any longer. Add in the fact that you had to fund a coming war (that was always going to last years instead of ONE YEAR) and get people to support it…..open the floodgates of credit, create the psychology of spending to defeat “terists” and guess what?

    The last piece of this puzzle is the creation of the auctions at Treas. dept. in……..wait for it…
    October 2002. You see they just had this great idea to auction off “excess tax receipts” to any willing bidder. Fast forward to the present and we still have “auctions” of tax receipts. With a huge deficit how this can still be believed is just ridiculous.

    Oh and that 5$ trillion spent in Iraq??….I bet that would come in handy right about now.


  16. kk commented on Feb 14

    The longer the monolines go without a credit downgrade, the more likely they can attract additional capital and survive somewhat intact. Maybe that is why Ackman talking his book so much, and unleashing Charlie Gasparino to stir up the masses.

  17. michael schumacher commented on Feb 14


    Ackman has been talking about this problem for over 5 years. Do a little research before you accuse someone of “talking his book”. but it’s ok to talk financials without any regard to fundamentals at all, or housing recovery without any analysis other than “fed model, blah, cash flows, blah.”

    They have been without clothes for longer than you realize. Buffet showed this to the masses for the first time but it is hardly anything new.

    But I see how short sellers have single-minded agenda’s…..that a long position doesn’t have…….

    caveat: short MBI from upper 50’s


  18. Stuart commented on Feb 14

    drip drip drip drip

  19. Norman commented on Feb 14

    Now I know we are near the bottom of the housing cycle when someone (The San Diego guy) feels free to say that zero rates wouldn’t help. Let us drop mortgage rates to only three percent and see what happens.

  20. Richard Leite commented on Feb 14

    Out of bullets? Depends on what the Fed wants to shoot. If they want to avoid a recession, than probably yes; but if they want to recapitalize the banks then no, all they have to do is keep the FedFunds below 5-10y Treasury Notes and they will help banks repair balance sheets.

  21. mock turtle commented on Feb 14

    here is a small, but by example, significant solution to the liquidity trap and “pushing on a string”

    the fed, thru an appropriate agency should lend money, directly to students who need a loan to attend a trade school, community or 4 year college.

    why should students and their families pay the arbitrage from which the student loan companies profit virtually risk free?

    that’s right, they have recourse to default thru government guarantees AND get a percentage if collection takes place there after.

    this might be a good investment for social security surplus money since social security is an inter-generational committment.

    after all if we are going to let foreign sovereign wealth funds buy into banks etc why shouldn’t our government invest a little of the taxpayers money in the future of our students.

  22. kk commented on Feb 14

    MS, Ackman is in fact talking his book more than ever, maybe because he senses it is quickly coming to a point of now or never for his thesis to work. He needs for current holders to distribute their stock, but they seem to be digging in. The more time that passes, the more the markets realize that the monolines potential claims are long tail in nature, and many of the numbers thrown out as probable losses now seem like quite a stretch.

    Buffett’s offer tells us nothing that the market didn’t already know. Solid business, profitable, low risk, what is not to like about that? As always, he wants to buy good assets at a big fat discount, hoping that a monoline is desperate enough to take him up on his offer. Of course they won’t bite because without the muni business, they become vulnerable. LOL…cash flows, fed models, blah blah, your right, maybe I need to switch my long term process to include sentiment, momentum, and other indicators. I never bought into paying up to buy certainty, maybe I’ll change my ways.

  23. ken h commented on Feb 14

    Gimme a break Barry. What’s with the Morningstar Bimbo to the right. Looks like she’s under Ben’s helicoptor. LOL.

    “Oh Ben, Yes!”

  24. Marcus Aurelius commented on Feb 14


    You have missed the boat – by a couple of days, it looks like.

    I have a deal for you: I’ll sell you my 4 year old Honda Accord for $42K/0 interest/6 year note. When will you accept delivery?

  25. VennData commented on Feb 14

    If the Ben Bernanke’s right about 2nd half growth resuming in his talk today, then interest rates will be going up very soon. That doesn’t sound bullish for stocks to me.

  26. kk commented on Feb 14

    MS, According to CNBC Ackman just went long the mortgage insurers.

  27. kk commented on Feb 14

    CNBC just corrected, Ackman buying puts on mortgage insurers. Gotta love the CNBC.

  28. michael schumacher commented on Feb 14


    still avoiding reality…..

    Ackman outlined the current problems FIVE years ago.

    There is nothing probable about what they HAVE lost and will continue to loose that is based on nothing more than continuing the “rubber stamp” method of doing biz. Even you can see that

    Or I suppose them paying a fine 0f $75 million (2006) for the very same questionable practices that they are currently spending quite a bit of time and effort (that really should be directed at coming clean rather than shooting the messenger) denying that it exists. But let’s just downgrade the end result of the greed and not the actual institution responsible for assigning the ratings. And while we are at it let’s discredit the one person who actually has done the DD and lays it out for all to see. Read it yourself….

    But all we get from MBI is “not fair”, with no actual facts or anything to discredit what is being presented. It is, for this example, one of the better looks into what is a flawed model to begin with that is wholly reliant upon “future business”

    You know as well as I do that the mono’s are being cuddled by wall street.

    Deny that at your own peril.

  29. michael schumacher commented on Feb 14

    you can bet that retail has already dumped MBI and the remaining players get hit even more if MBI goes under. Losing it’ s rating causes a spiral of write downs for the major holders of the stock.


    It is out of date since we are talking 9/30 filings however it is in the best interest of most of those firms that MBI does not loose it’s ratings.

    If it does loose it’s rating the losses that the ENTIRE market will suffer will pale in comparison to what the holders of the stock will loose in filing for protection.

    It’s just another back stop………

    Simply put if you do not have the capital to pay out what you’ve already charged for that is called insolvency………….that is what Ackman has DEMONSTRATED.

    Again deny it at your own peril


  30. Norman commented on Feb 14

    Marcus Aurelius said: :”I have a deal for you: I’ll sell you my 4 year old Honda Accord for $42K/0 interest/6 year note. When will you accept delivery?”

    Marcus, Marcus, Marcus. That Honda is worth only about $11,000. So, are you implying that houses are 75% overvalued?

    Even if super-bear Shiller is right that a 20% house price drop is ahead of us a zero percent loan at today’s prices would be a steal. We’d be even in four years and then mortgage free after that. But we ain’t seeing that kind of a drop, anyway.

    Rates do matter buy try again, this time with a decent argument.

  31. Street Creds commented on Feb 14

    That was talk-to-me-Maria. I don’t think she knows the difference.

  32. michael schumacher commented on Feb 14

    Watching CNBC……I see where you get your information from.

    Good luck with that….


  33. mhm commented on Feb 14

    “Fed Interest-Rate Cuts Fail to Lower Borrowing Costs”

    I don’t think that was the major idea though…

    The Fed first and foremost mandate is to keep the banking system working right? Well the average bank fractional reserve is negative, they need billions of USD and lots more in the future. Do you see the connection of lower rates and TAFs? Lower rates also lowers the cost of reverse term repos for banks that need liquidity.

    Joe NoIncome/HouseFlipper can’t pay his mortgage? It is a problem, yes, but the most pressing problem is to keep the banks door open.

    That is my view is a few words. YMMV.

  34. Pat G. commented on Feb 14

    The FED’s got lots of bullets left. The problem is that they can’t fix all of the problems using them & they risk the chance of creating a much bigger problem in the future whether they are successful or not. But hey…that’s what I’m counting on.

  35. cinefoz commented on Feb 14

    God, you all look like frightened fools. For once, at least in recent memory, I can’t think of anything to say that could bring order to the happy sense of panic frolicking around here.

    The market dipped a little — Happy Happy Joy Joy! You clowns are like pigs in shit when a little bad news comes you way. It doesn’t have to be really bad news … just spinnable bad news, punctuated by a dip in the market.

    Given the fine cartoon posted as economic insight, I wonder if this might be degenerate into Ren and Stimpy economics.

    Ren: “You are stupid Stimpy, if you think the world is not about to end. You are going to eat BEANS!!!”

    Stimpy: “Oh Ren. Get a life”

    Well, it’s still up after yesterday. Sorry to piss on your foot. I’m still up for the year and I plan to make a lot this year.

  36. mhm commented on Feb 14

    “I’m still up for the year and I plan to make a lot this year.”

    Your level of denial say you are in love with your strategy. That is a sure way to disaster. Good luck though.

  37. rickrude commented on Feb 14

    why not give every US citizen $100k, a one time shot in the arm from the FED ??

    Unlike debt, everybody will accept the stimulus package and it will boost consumer spending !!!!

  38. E commented on Feb 14

    mhm is right, and I’m surprised many readers of this blog haven’t caught on. The fed is working to avert a banking crisis. Period. End of story.

  39. B.B. commented on Feb 14


    Your ego and lack of humility will serve you best. MHM is correct. You were asking the other day about the mindset of SS sellers, you didn’t understand them. You are asking questions like that but yet investing for yourself? LOL, Good Luck my friend, the ol’ market will have a very nice surprise for you one day. BTW, please keep posting, I am saving them. You are good!

  40. Gary commented on Feb 14

    anyone see Pershing Square’s return for 2007? 5 yrs of work for what, a 20% return??? no wonder Ackmans talking his book so much-

  41. A Dash of Insight commented on Feb 14

    Seeking Balance from Bloggers and Media

    The courtroom oath, The truth, the whole truth, and nothing but the truth, is a good test for articles in the blogosphere and in mainstream media. We have suggested that investors have a difficult task in sorting through the available

  42. wunsacon commented on Feb 14

    There *SHOULD* be a banking crisis. MANY bankers created NO VALUE during the past few years but POCKETED MILLIONS in salaries and bonuses, all at the expense of shareholders and customers. Many of these people *SHOULD* be unemployed and forced to retrain for a new vocation, perhaps working on:
    – solar energy,
    – the space elevator,
    – new strains of corn,
    – a cure for cancer,
    – high-speed train technology,
    – a new aria,
    – a sculpture,
    – the Gates Foundation, or
    – many other things of merit.

    The less money there is in banking, the more smart people migrate to other vocations.

    THAT’s how capitalism is SUPPOSED to work.

    Bring on the new economy!

  43. cinefoz observer commented on Feb 14

    I sure hope cinefoz is right, as I’m generally long (mostly in the commodities complex).

    But, based on reading this blog, I just keep thinking I’m “wrong” right now. That would make cinefoz wrong “by transitive” (unless you’re in markedly different positions, cinefoz).

    Remember, folks, cinefoz started getting ornery only after a few of you started banging heads with him. That’s a fairly human quality. Don’t hold it against him.

  44. Winston Munn commented on Feb 14

    There is no doubt the banks and insurers will be bailed out, the losses socialized, and the guilty parties set free.

    Juan Carlos Arroya Calderon at The Wall Street Examiner gives an example of the thinking behind the bailouts:

    Quoting a NYT letter in favor of the Howar Milstein bank bailout plan:

    “Howard P. Milstein is right on target when he proposes that the government guarantee the principal of subprime mortgages for 15 years in exchange for the banks keeping their teaser interest rates in place during that time.

    This financial circuit breaker would stop the downward self-reinforcing spiral in the real estate market, and it would, at the same time, help provide much needed capital to the banking industry.

    Calm would be restored, liquidity would be provided, people would keep their homes, and whole communities would be saved.

    Alfred DelliBovi
    New York, Feb. 7, 2008”

    Mr. Calderon then points out: “The writer is president and chief executive of the Federal Home Loan Bank of New York.”

    The MBS losses will be socialized, and a quasi-nationalization of the MBS industry will occur. It is a given. And there is a simple reason.

    The problem is too large for conventional methods to solve – and the losses cannot be tolerated because they threaten power.

  45. tom commented on Feb 15

    Banks raising consumer rates?
    Yeah, as high as 32% on credit cards.
    Still wonder where that $300 “stimulus” tax rebate is gonna go?

  46. DavidB commented on Feb 15

    The Fed is out of bullets. What about Helicopter(remember the original reason he got the name helicopter?) Ben’s big honking shotgun of buying any and all assets the fed chooses to buy including anything corporate if push comes to shove.

    This isn’t about impotency this will all come down to the will to do something. As far as my eye can see uncle Ben is still willing to fund that put with the printing press

  47. Tejvan Pettinger commented on Feb 15

    It’s a good point, but lower interest rates will help prevent mortgage defaults, especially for people with subprime mortgages

  48. Tejvan Pettinger commented on Feb 15

    It’s a good point, but lower interest rates will help prevent mortgage defaults, especially for people with subprime mortgages

  49. Tejvan Pettinger commented on Feb 15

    It’s a good point, but lower interest rates will help prevent mortgage defaults, especially for people with subprime mortgages

  50. cinefoz commented on Feb 15

    cinefoz observer,

    Thank you for your kind words. I prefer to take the high road and explore new ideas. But I’m also a gigantic smartass by nature and it’s easy to degenerate on a moment’s notice. Plus it’s fun from time to time.

    I think you’re wrong that you’re wrong. The economy isn’t perfect. It’s a little down, but looks much worse because life after bubble economics looks a little bleak. It’s only bleak by comparison. The crack has been taken away from the addict and withdrawal is going on now. Consider this rehab for the economy. Normal life awaits after 30 or 60 days of medical attention.

    Think of the financial system as a crack whore that is facing life without the pipe. She’s freaking now, but a lot of it is only theatrics and negotiation for getting the crack back.

  51. cinefoz commented on Feb 15


    You’re saving my stuff? Hopefully it is not for cleaning up the dog’s accidents. If that is your purpose, I am still flattered. If you are saving my stuff for posterity, then I’d be speechless if I had any humility or a small ego.

    Regarding the short sellers, I am interested in a particular aspect of their activity and the mindset behind it. Betting on a stock going down makes sense if you have a reason to think it will.

    Rather, I am curious about the panic melt-up that goes on when markets rise out of control when short sellers cover their bad bets in a rising market. What is the step by step thinking of the short seller when it looks like the bet is going bad and the market will continue to rise? I am trying to extrapolate the individual short covering panic into a macro economic look at a short covering panic that affects the entire market.

    I am trying to put together a picture of the psychology and economics of panic short covering, at both the individual and market level. What does it take to trigger it?

    Has anybody written about this?

    I’m not a short seller and really don’t understand it. However, I am a pretty fair market timer and I might look into it if I can find a good etf or fund that allows quick entry and exit. I might put a few trial bucks into one when the next dip arrives later this year (I expect the market to rise a lot before that dip arrives.)

  52. DMR commented on Feb 16

    Considering that Darwin just took 8 people with poor judgement off the D.C. streets today (people who stand next to an illegal drag race are often the same people who spend money when they are in financial trouble), I’m now less inclined to believe in the success of the stimulus package. :)

  53. Deborah commented on Feb 17

    There never were economic benefits to cutting rates, only the illusion, and that is the biggest misconception out there. Perhaps there could be real economic benefits to cutting rates, but only with strong regulatory control over the issuance of debt based on the amount of debt, not the amount of debt that can be serviced based on the rate.

  54. Scott commented on Feb 23

    The states with the real estate bubble should be given the bill to clean up the mess!

    Citizens of Iowa should not have to pay for the sins of those in California!

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