For those of you that did not read MBS Breaking News: Full Text of Press Release... this post was the host of an interesting debate between two different market perspectives . I am addressing some of the comments made on this post.

Ah hem...allow me to clear my throat.

Mr.Lane,

In reading our afternoon blog post comments I came across the additions you made to our recent discussion regarding what most of our readers believe to be "a light at the end of the tunnel". First off please allow me to thank you for your insights and input....we would never turn away a willing participant from the other side of the market. Furthermore you should know that I am in no way attempting to chastise or embarrass you in this letter. In fact I encourgage your response, but, of course, there is no pressure to do so. I can only hope for the best case....you provide an intellectual response and we open an enlightening discussion that leaves everyone better off for participating.

I would like to address your comments now...

I have to say you sound exhausted from the seemingly endless involvement of the "invisible hand" in capital markets. That feeling is to be expected, across the board it has been a year for the record books. US stock indices are down 35-42% YTD, aggregate demand and the US job's market are heading into a downward spiral, Treasury yields are at all time lows...etc we all know the story of how crappy the economy is currently. It is understandable that you might be frustrated, after all that government spending not too much has changed for the better. Please bear with me while I revisit some of the strategies that have been ineffectively employed to restore the flow of credit to businesses and households...

The TSLF

"The TSLF is a 28-day facility that will offer Treasury general collateral (GC) to the Federal Reserve Bank of New York's primary dealers in exchange for other program-eligible collateral. It is intended to promote liquidity in the financing markets for Treasury and other collateral and thus to foster the functioning of financial markets more generally."

The PDCF

" The Primary Dealer Credit Facility (PDCF) is an overnight loan facility that will provide funding to primary dealers in exchange for any tri-party-eligible collateral and is intended to foster the functioning of financial markets more generally. "

The CPFF

"The purpose of the CPFF is to enhance the liquidity of the commercial paper market by increasing the availability of term commercial paper funding to issuers and by providing greater assurance to both issuers and investors that firms will be able to roll over their maturing commercial paper.  These steps should contribute to an overall improvement of conditions in credit markets."

The MMIFF

"The short-term debt markets have been under considerable strain in recent weeks as money market mutual funds and other investors have been increasing their liquidity positions by investing in shorter-term-frequently overnight-assets. By facilitating sales of money market instruments in the secondary market, the MMIFF should give money market mutual funds and other money market investors confidence that they can extend the terms of their investments and still maintain appropriate liquidity positions. Greater access to term financing from money market investors will enhance the ability of banks and other financial intermediaries to accommodate the credit needs of businesses and households."

The TALF

"The asset-backed securities (ABS) market has been under strain for some months.  This strain accelerated in the third quarter of 2008 and the market came to a near-complete halt in October.  At the same time, interest rate spreads on AAA-rated tranches of ABS rose to levels well outside the range of historical experience, reflecting unusually high risk premiums.  The ABS markets historically have funded a substantial share of consumer credit and U.S. Small Business Administration (SBA)-guaranteed small business loans.  Continued disruption of these markets could significantly limit the availability of credit to households and small businesses and thereby contribute to further weakening of U.S. economic activity.  The TALF is designed to increase credit availability and support economic activity by facilitating renewed issuance of consumer and small business ABS at more normal interest rate spreads."

Perhaps ineffective was an inappropriate adjective to describe these unordinary Federal Reserve policy tools. These facilities have definitely served to "foster the functioning of capital markets" and at some point will be the true force behind any stabilization of the rate of recession.  But that is just it...they will stabilize. Not rebuild. Restoration of an efficient capital marketplace won't return until the core crisis is properly addressed.

That said I must state that I disagree with the reference you made regarding the decision of our financial leaders to use $500bn US dollars to purchase mortgage backed securities in the open market. You described the strategy as just another "completely irresponsible act". I deem you are intending to imply that the insatiable spending spree that "Uncle Sam" has been on for the past 15 months was and remains the incorrect policy approach necessary to control this financial crisis? The buying bender that has bloated our Budget Deficit to an estimated $408 billion??? The splurging that has swelled the US National Debt bubble to a whopping $10,024,724,896,912.49 or 70% of GDP. You dont believe deficit spending is the way to go do you?

To allow for the corrective perspective of your preferred strategies I need to find out a few things about you...do you support the Classical School of Macroeconomics? Do feel that this was a natural regression to the mean, a process that is necessary to provide a proper cleansing and re-evolution of our domestically global economy. A classical economist would argue that these spikes in economic activity would have self-regulated themselves and the government should have done nothing. If you think the financial innovation led to an overly efficient capital market then this is probably your school of thought...technological changes are usually the reason behind these economic shocks in the eyes of a classical macroeconomist. But once the whirlwind of rescues and recoveries darkened the economic outlook how might you have responded if you were to stay true to your school? Tax benefits? Would those have been fast enough to spur on consumer spending? If you are indeed a Classical Theory supporter what is to say letting the economy self regulate itself wouldnt result in a deflationary spiral? I can't see you sticking to your guns this long after everything that has taken place over the past 15 months....at some point everyone questions their fundamental beliefs. Maybe you have swayed towards the monetarist approach?

Do you believe the economy will self regulate itself provided monetary policy is kept stable and money growth/supply is steady? A monetarist generally believes the quantity of money is the most important influence on a countries demand for goods and services. Fundamentally this belief assumes that the Federal Reserve has the ability to control the quantity of money and therefore has a stronger influence over employment...it seems irrational for you to be supporting this line of thinking after the Federal Reserve's inability to control or even influence money creation. A monetarist should have jumped on board the Quantitative Easing float boat after TALF was announced.

I can't possibly believe you are a Keynesian.This school of thought teaches that everything is based off expectations and that the economy would rarely operate efficiently without fiscal and monetary intervention. If you supported Keynesian's concepts you would be cheering the recent political commitment to the most glaring problem at hand... uncontrolled depreciating assets. I cant quite figure out what your stance is on how to eat away at this crisis. Doesn't fixing housing feel progressive to you? What better way to restore the flow of credit and grease the wheels of the US banking system than to provide low cost financing for the oversold American Dream? I don't see many other options at this point. Please elaborate on what other lines of attack are available at this point? How could this crisis been handled differently?

I respectfully await your response. 

Yours Truly,

AQ

PS It is hard to question the moral turpitude of the few remaining professionals in the mortgage and real estate industry. These people have fought tooth and nail to survive over the past year...anyone who is left standing has plenty of hard knocks to prove their commitment to ethical lending standards. Plus they don't have a choice...the secondary market doesnt provide financing for "irresponsible loans" and even government programs question common sense. I dont think you intentionally implied that the mortgage bankers and brokers still originating loans are at fault....if those were your intentions please elaborate on the statement.

PPS...FLOAT BOAT IS OUT TO SEA