More with less blather

This on the dollar, whether intervention works. Note to self: brush up on FX understanding, because getting a feel for it in the fixed-rate regime of Bretton woods via the Jenkins memoirs is no substitute.

This which I think was originally found on Brad deLong. A good explanation of how monetary policy is a blunt instrument:

While officials were able to inject liquidity into the
financial system, they had no way to insure that the
funds got to the institutions that needed it most.
Realizing the failings of their traditional tools, Fed officials
innovated creating a new lending procedures in the
form of the Term Auction Facility and the Primary
Dealer Credit Facility, as well as changed their securities
lending program creating the Term Securities Lending
Facility.

The article contains a literal explanation of how the Fed operates, which I find very useful. In fact, the whole article is extremely handy on central bank operations.

Bernanke's speech at Jackson Hole on housing matters is full of useful references. Summarizes it pretty well here:

As you know, the financial stress has not been confined to mortgage markets. The markets for asset-backed commercial paper and for lower-rated unsecured commercial paper market also have suffered from pronounced declines in investor demand, and the associated flight to quality has contributed to surges in the demand for short-dated Treasury bills, pushing T-bill rates down sharply on some days. Swings in stock prices have been sharp, with implied price volatilities rising to about twice the levels seen in the spring. Credit spreads for a range of financial instruments have widened, notably for lower-rated corporate credits. Diminished demand for loans and bonds to finance highly leveraged transactions has increased some banks' concerns that they may have to bring significant quantities of these instruments onto their balance sheets. These banks, as well as those that have committed to serve as back-up facilities to commercial paper programs, have become more protective of their liquidity and balance-sheet capacity.


Some insight on the question of why the fear is so much greater than the subprime losses:

Although this episode appears to have been triggered largely by heightened concerns about subprime mortgages, global financial losses have far exceeded even the most pessimistic projections of credit losses on those loans. In part, these wider losses likely reflect concerns that weakness in U.S. housing will restrain overall economic growth. But other factors are also at work. Investor uncertainty has increased significantly, as the difficulty of evaluating the risks of structured products that can be opaque or have complex payoffs has become more evident. Also, as in many episodes of financial stress, uncertainty about possible forced sales by leveraged participants and a higher cost of risk capital seem to have made investors hesitant to take advantage of possible buying opportunities. More generally, investors may have become less willing to assume risk.


Also interesting on the subject of how Regulation Q - limits on deposit rates - causes monetary policy to have an exaggerated effect, as higher rates caused money to leave deposit-taking institutions for elsewhere, and limited their ability to lend.

This is a useful insight:

High inflation was also ultimately reflected in high nominal long-term rates on new mortgages, which had the effect of "front loading" the real payments made by holders of long-term, fixed-rate mortgages. This front-loading reduced affordability and further limited the extension of mortgage credit, thereby restraining construction activity.

This explains why money illusion can still help a housing boom along - it changes timings.

He discusses how innovations have decoupled housing and construction from the economic cycle. But other effects have come in: home equity is now much more liquid.

BDL draws attention to the positive feedback effect of marking to market.