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Karim writes:

Not a word you often see a Fed Chairman use:

….stabilization of our financial system is an essential precondition for economic recovery. I urge the Congress to act quickly to address the grave threats to financial stability that we currently face.

He outlined the channels in which this impacts the economy in this paragraph:

Ongoing developments in financial markets are directly affecting the broader economy through several channels, most notably by restricting the availability of credit. Mortgage credit terms have tightened significantly and fees have risen, especially for potential borrowers who lack substantial down payments or who have blemished credit histories. Mortgages that are ineligible for credit guarantees by Fannie Mae or Freddie Mac–for example, nonconforming jumbo mortgages–cannot be securitized and thus carry much higher interest rates than conforming mortgages. Some lenders have reduced borrowing limits on home equity lines of credit. Households also appear to be having more difficulty of late in obtaining nonmortgage credit. For example, the Federal Reserve’s Senior Loan Officer Opinion Survey reported that as of July an increasing proportion of banks had tightened standards for credit card and other consumer loans. In the business sector, through August, the financially strongest firms remained able to issue bonds but bond issuance by speculative-grade firms remained very light. More recently, however, deteriorating financial market conditions have disrupted the commercial paper market and other forms of financing for a wide range of firms, including investment-grade firms. Financing for commercial real estate projects has also tightened very significantly.

When worried lenders tighten credit, then spending, production, and job creation slow.

Separately, he stated that:

  • Economic activity was ‘decelerating broadly’ and that second half growth would be ‘appreciably below potential’
  • He noted improved housing affordability but also that th
  • He cited the usual ‘over time’ for the economy to improve and that inflation would moderate ‘later this year and next’, with significant uncertainty attached to both forecasts.


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2 Responses

  1. Warren,

    I was listening to my local NPR station, and they had a guy on (Sloan?) saying that none of the banks are even using the lending the facilities that the Fed has setup to take these mortgage assets as collateral for loans. Nor is anyone using the discount window. Is this true? Any way to check?

    It seems to me this entire crisis is manufactured, with Goldman and Morgan having changed their status to commercial banks, they also have access to the discount window. Since all the major players can just borrow from the Fed, why do they even need a bailout?

    What am I missing?

  2. probably true. yes, you can check on the NY Fed’s website.

    they don’t need a bailout and the proposal isn’t a bailout anyway, just a wheelspin.

    our leaders are in over their heads. a quick lesson in public accounting and reserve accounting would go a long way

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