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Strategies & Market Trends : The Residential Real Estate Crash Index -- Ignore unavailable to you. Want to Upgrade?

To: Moominoid who wrote (88784)	9/11/2007 4:33:14 PM
From: ahhaha	Respond to of 306849

Though some or many thinks the market drives the Fed. FED's persistent presence has obviated the market. If a market can't freely price for 10 years, it loses the ability to price. No one ever knows the equilibrium price of money. FED price fixing crowds out the discovery mechanism. The equilibrium price, where interest rate should instantaneously occur, is discovered when all the little and big guys are in the bond market slugging it out for reserves. FED's presence neutralizes such participation. The equilibration occurs at the margin, at the degree that is not visible. FED kills the margin where price is set. Proof: Fed funds has been at 5.25 for a year with almost no fluctuation. The players, borrowers, are satisfied with the effective quantity of money it gets through this mark. But look what happens. The gamers use this rate which superficially looks relatively tight to engage in games which brings its cost down to say 1%. Trouble starts in say, re, from this accommodation that was never intended by FED but operates unknown to FED. Then the pundits blame lending standards when the only way such standards could be bent and abused would be if there's no fear of god potentially available in a free market that would be showing a punishing rate say, of 6% when the gamers tried to get a load that they would convert to 1% money. With that fear of god, the gamesters don't get in gear. The fed funds rate need not be at 6% to achieve this. In a free market intraday demand for loanable funds could cause the rate to fluctuate up to 8% with it closing at 4%. Thus, excess demand or supply is instantaneously punished or resolved. Instead, FED supplies all takes above target. The rate never gets to balance supply and demand under this kind of regime. The result is dislocations, things like allowing re to inflate under the ridiculous claim that economy would go into depression unless FED accommodated by allowing more reserve creation than was needed for economic growth. Only a randomly fluctuating fed funds rate intraday driven by individuals can find this subtle and changing equilibrium rate without allowing the embedding of dislocations.