E The Federal Reserve Knew LIBOR Was Exploding In 2007 And Did Nothing

Turns out, based on the chart again, the Fed was way too tight even though it knew that the economy was at risk by simply watching the explosion of the LIBOR rate in 2007. I think the Fed wanted to experiment with the economy and this crash was done on purpose. That is my opinion only.

Yet, economists don't take into account that decisions by the Fed protect the banks first and economy second. And they don't take into account that the Fed keeps rates low to protect the banks, even more so as the new clearing houses for derivatives requires even more bonds as collateral than ever before!

Economists think that the Fed wants banks to make money on higher interest. That used to be true, but it may no longer be central to bank stability.

The Fed clearly has the dual mandate to: 1. protect the banks and 2. to create demand for bonds no matter what the impact on main street.

So, I found myself saying this again to Mr. Hummel, in a way that would move economists to take on the subject of the supply and demand for long bonds:

...Those (treasury) bonds are being hoarded and long bond yields will be pushed down forever by this plan, or conspiracy or whatever you want to call it. Long bonds no longer react to expected measurements. CATO and most economists are blind to this new reality. Supply and demand of bonds in those markets is a worthy topic for economic study yet none of you seem to want to do it. I am not an economist so you are going to have to do it. If you never do it it makes people like me question the veracity of your profession.

It has been said that a nearly a trillion to 4 trillion dollars worth of bonds are needed in the clearing houses for collateral. And then consider that if bonds were to go up in yield  there would be margin calls on the collateral, and even more bonds would have to be hoarded.

The firms who are counter parties don't know interest rates won't likely go up by much, because of actions by the Fed and the demand created for bonds, so they buy extra bonds. The Fed really did it this time. The Fed is (also) in the business of keeping interest rates low, by backing the banks as they bet on low floating LIBOR and pass the fixed swaps rate to the counter parties. Put the two together and you wonder why we will never see strong growth in the economy for as long as we are alive!

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Disclosure: I am not an investment counselor nor am I an attorney so my views are not to be considered investment advice.

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