William C. Dudley, executive vice-president of the Federal Reserve Bank of Philadelphia, gave an interesting speech October 17th that he titled, May You Live In Interesting Times. The Dow closed down 367 points yesterday, in large part on credit concerns, showing that these are interesting times indeed. Here in the blogosphere, we’re used to "gloom and doom." However, I was surprised to read the following from a Fed vice-president:
Briefly, let me give you a few examples of events that I never expected to see—ever:
- AAA-rated mortgage-backed securities selling at 85 or 90 cents on the dollar,
- asset-backed commercial paper backstopped by real assets and a full bank credit backstop yielding more than unsecured commercial paper issued by the same bank—in other words, the real assets as collateral viewed by market participants as a negative rather than a positive,
- 3-month LIBOR (the interbank deposit rate in London for dollars) as high as 100 basis points above the fed funds rate target—certainly possible if the monetary authorities were in the process of tightening monetary policy aggressively, but nearly inconceivable given the widely held expectation that the central bank would likely be cutting interest rates,
- Treasury bill rates rising and falling 100 basis points in a single day, and
- nearly a failed Treasury bill auction—total bids were barely sufficient to cover the amount the Treasury was offering. This near-miss occurred despite the fact that money market mutual fund investors were fleeing to rather than away from Treasury securities.
He goes on to describe how developments have caused the market to lose confidence, and describes what this has triggered:
