We’ve heard a lot from the analysts and government officials on the effectiveness of the Fed’s intervention. While there is still plenty of concern, the general mood seems to be "Whew! We dodged that bullet!" Take this example from CNBC yesterday:
Well-known banking analyst Richard Bove even delivered a report on the financial sector Thursday with the bold heading, "The Financial Crisis Is Over."
Bove, of Punk Ziegel, admitted in the note that such a proclamation "sounds ridiculous," but he genuinely believes the crisis is over.
"There will be more negative developments, but they will be meaningless," Bove wrote.
Later, in an interview on CNBC, Bove said: "I’m convinced that all the signs that you would want to see that would tell you that this thing is over are there. And this is over."
The consensus is not universal however. Many thanks to John for this article from economist Nouriel Roubini:
First note that in spite of the most radical change in Fed policy since the Great Depression – i.e. the extension of the Fed’s lender of last resort support to non bank primary dealers and the announced swap of up to $400 bn of safe Treasuries for toxic agency and private label MBS again make available also to non bank primary dealers – the panic in money markets and interbank markets is now seriously worsening: today the yield on 3 month Treasuries plunged to 0.56, a level not seen since the 1950s; the TED spread (the difference between dollar Libor and 3 month T-bills) increased 32 basis points to 1.98 percentage points; swap spreads widened again; while the VIX spiked to a level close to 30; even off-the-run long dated Treasuries are becoming illiquid (as in the 1998 LTCM crisis). The situation in money markets is scary as there is a generalized flight to safety with investors avoiding everything but the most liquid and safe government bonds.
In the meanwhile the liquidity and credit crunch in the agency debt and MBS market is worsening in spite of all the Fed recent easing actions and in spite of the Fed decision to swap Treasuries for hundreds of billions of agency and private label MBS: the difference in yields for Fannie Mae’s current-coupon, 30-year fixed-rate mortgage bonds and 10- year government notes widened again both yesterday and today. So the radical decision of the Fed to prop the agency and non-agency MBS market with $400 bn of swaps has done very little to affect the liquidity and spreads of these markets. This is no wonder as Fannie and Freddie are – on a mark to market basis – effectively insolvent and the widening in their debt and MBS spreads reflect the worsening credit outlook for their assets, not just a situation of illiquidity.
