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I hope the Fed doesn't intend to inject a load of confidence into the market.
First, liquidity is significantly higher than it would otherwise be due to the proliferation of financial products and innovation by financial providers. This extraordinary growth itself is made possible by remarkable improvements in risk-management techniques.
As Ritholtz would say, now we're really fluctuated.
Therefore, I wish to advance a simple proposition: Liquidity is confidence.
Well, if I recall the phrase "credit is confidence" dates to the Depression era, and credit is one of the primary drivers of liquidity if I understand the concept correctly...
And I have to admit that trying to understand liquidtiy is one of those things that makes me cry at night.
The best I can come up with is that liquidity is the ease with which cash can get to the people that need/want it and confidence in loans, equities, etc. greatly assist in this endeavor.
So easy credit creates lots of loans which form channels that move cash efficiently through the economy and such. The same (but different) with equities.
Again this is just stuff I make up to grapple with the subject. Any thoughts?
This is absolute rubbish.
Therefore, I wish to advance a simple proposition: Liquidity is STUPIDITY
ex:
"First, STUPIDITY is significantly higher than it would otherwise be due to the proliferation of financial products and innovation by financial providers."
there...that sounds more accurate!
This is absolute rubbish.
Really?
So all those subprime lenders that have gone under are still doing loans from the afterlife?
Warsh is the youngest and least credentialed appointee to the Fed. No economics degree for this lawyer and former MS employee where his Disclosure Form reveals that he harvested well.
So statements like this:
The Great Moderation, however, is neither a law of physics nor a guarantee of future outcomes.
are pontifications that come from knowing the Cliff Notes rather than the literature.
This is new money talking as if it were the Oracle...like all new money.
Why should I entertain this rancid nugget of wisdom that 'liquidity is confidence'? Why should I sit still for this old Greenspan BS about
remarkable improvements in risk-management techniques.
or
In theory, reduced volatility, if perceived to be persistent, can support higher asset valuations--and lower risk premiums--as investors require less compensation for risks about expected growth and inflation.
Could be the multi-millionaire is feeling like he missed his period as Philosopher King.
"First, liquidity is significantly higher than it would otherwise be due to the proliferation of financial products and innovation by financial providers. This extraordinary growth itself is made possible by remarkable improvements in risk-management techniques."
Apply this to the subprime lending market and you get just one example of how full of crap this guy is. This was not risk management. It was an appearance of a lack of risk built on incredibly foolish assumptions that were backed up by numerous and various industry shills, that kept people from realizing what an unsustainable racket the whole thing is. 100% rubbish I say. Walsh strikes me as someone who is scared s*&tless of what he sees and trying to pull the ultimate CYA.
my second point, calmo, is the appearance of a strong macro economy is in large part a result of the rubbish that built up the housing bubble. I mean, look at this economy..the lowest rates ever, the biggest asset bubble imaginable, gigantic tax cuts, and still most people are struggling. If you want to judge a strong economy by good macro numbers, driven by the top 5% of the income distribution, be my guest.
Calmo, Im not arguing with you. I just think these arguments are BS.
Where do we find these people to run our country?
My question is exactly what is the confidence based on? If risks are Quantifiable on what basis?
If I am out playing golf with a CEO or insider of a public company X and he/she mentions to me that they are in the process of being sold then I can have high confidence in the inside information, wink etc.
The average retail investor surely does not have adequate quantifiable data to base his/her investment decisions on. Certainly nothing compared to the investment banks and other insiders. Instead we have TA and analyst recommendations plus news noise.
The best I can come up with is that liquidity is the ease with which cash can get to the people that need/want it
Yeah, ac, since I'm just some punk mortgage underwriter--that's lower than even some two-bit fake philosopher-king on the ludicrous scale--I've always been fascinated precisely at this point in the apparent argument. Back in the dim mists of my youth, "liquidation" meant converting an asset to cash. Therefore, "liquidity" was a measure of the efficiency with which an asset could be reduced to cash. I used this simple-minded definition a lot when the trainee underwriters would come in and question why the guidelines for borrower reserves always referred to "liquid assets." I would patiently explain that a borrower's shares of Pets.com were liquid, but the borrower's vintage Matchbox car collection was not liquid, even if, at the end of the day, the latter was probably "worth more" than the former. Liquidity was a matter of a functioning market and an observable price, regardless of what that price was. After having established liquidity, we would go on to recommended methods of valuation.
So at some point when I was busy misleading an entire generation of underwriters, "liquidity" became the efficiency with which cash was converted into an "asset," namely a "debt instrument." You can imagine how startled I was. And then I discovered that "backwardation" is a real term, so at least I had some polite language to use to describe my predicament.
Agreed Geoff, that the subprime market is making "remarkable improvements in risk-management techniques" look atleast disingenuous, but, as you can tell, I'm unable to suspend judgment knowing what his background is.
Sort of like listening to Bill Gates as if he knew something about education...surely I have better uses of my time?
But Warsh could get lucky and say something important by mistake...I just don't have the suspenders that CR has.
Would it be important to distinguish whose confidence is at stake here? Is that company that is about to take over its competitor impacted by liquidity issues? Can we tie this idea "liquidity is confidence" down to particulars without invoking the Greenspeak?
No, we can't and we won't.
That is not the package.
This is: Warsh is so wise.
Geoff - I hate to point out the obvious but it is a Global Economy and 30% of US students don't graduate from High School - they can't compete! I feel sorry for them.
Here is the fundamental, BIG PICTURE, problem of the last 50 years. In 1947 the US was truely the Only World Superpower - economically speaking. WW II distroyed productive capacity everywhere except in the US (South America excluded).
Since then, the world has recovered, 1st Europe then Japan, then the Asian Tigers, now China, India, South America are all on line. Because of this, the Dollar has been falling since 1970.
To me it is amazing that the US has done as well as it has with all the competition that has come online.
The trend will continue to be that the under-educated in the US will be the losers. Most Americans don't understand the BIG PICTURE.
Tanta, I think you should be appointed to the Fed!
This speech reminded me of Greenspan's famous technology speech in March 2000 that marked the top of the Nasdaq insanity. I think this speech is something eerily similar (although I don't want to elevate poor Mr. Warsh to Greenspan's level).
Best Wishes.
Tennis, I'm well aware that we have laggards amongst us, who with globalization, are the ones likely to suffer. My point was more directly addressed by Calmo - this isn't financial innovation; it's a pile of stinking turds that can be papered over for only so long before the stink gets so strong you realize something rotten is under the wrapping paper. The question now is how much this so called savings glut of liquidity, (which frankly, I dont think is any such thing) will, once it inevitably ends, uncover the multitude of scams that looked about as good as many of the b2b commerce models of the dotcom era.
First, liquidity is significantly higher than it would otherwise be due to the proliferation of financial products and innovation by financial providers. This extraordinary growth itself is made possible by remarkable improvements in risk-management techniques.
The problem with the American political dialogue is that the Right is always looking for mens rea and the Left never is.
What's the flip side of this pronouncement by this economic whiz kid?
The flip side is that if there is a problem in the mortgage market, it has been caused by chiselers on relief who have upset the financial innovations of their betters through fraud.
I just spoke to "My Friend the Libertarian" and he is mad as hell...at the borrowers. The people who lied to get a mortgage, and now he's going to have to pick up the pieces.
Soak the poor.
To me it is amazing that the US has done as well as it has with all the competition that has come online.
The trend will continue to be that the under-educated in the US will be the losers. Most Americans don't understand the BIG PICTURE.
Is this the same Tennis_8 we had yesterday?
This sounds quite a lot like something some of the nasty bears around here would say.
OK Tanta, here's a hanging curve ball...want to translate "making certain our business data is secure"?
"Fremont Puts Some Staff on Leave, Won't Make New Subprime Loans
March 5 (Bloomberg) -- Fremont General Corp., whose stock
has fallen about 60 percent this year, put some of its
residential loan staff on paid leave pending further
information'' and said it won't make any more subprime mortgages.
The financial services holding company saidmany'' workers
were sent home, according to an e-mailed statement today.
Managers and operations people ``are continuing to work today and
are making certain that our business data is secure and our
customers are taken care of.'
I'm signing up for Geoff's newsletter - this speech was rubbish.
I'll give the guy credit for identifying a 'driver' of liquidity (confidence or optimism)... But I know lotsa very confident people and between them they could maybe finance a latte.
I'd say liquidity is like electronics or fluid mechanics... there needs to be BOTH a 'potential' and a 'flow' component.
Potential is the equivalent of voltage or pressure and the 'flow' is the current (or flow rate).
Just having a whole lotta wannabe investors won't get you much liquidity. Likewise having a lotta 'wealth' lying about won't get you there either. There has to be a lot available & there has to be a desire or need to put it to 'work'... somehow.
But like a hydrodynamics or electronics just having flow & pressure doesn't mean it will DO meaningful work... all this liquidity could squirt out via a leak or through an 'expansion valve' - lots of energy liberated but all you have to show is heat & useless entropy.
Oh well back to looking at parts...
OT
Las Vegas Association of Realtors just out with Feb sales numbers... not publicly tho..I don't know how but I bookmarked their link long (couple years) ago can't get there from their main sight now. Don't think they would want people seeing these numbers sales are down right pathetic!
http://www.lasvegasrealtor.com/stats/statindex.htm
OT
Las Vegas Association of Realtors just out with Feb sales numbers... not publicly tho..I don't know how but I bookmarked their link long (couple years) ago can't get there from their main sight now. Don't think they would want people seeing these numbers sales are down right pathetic!
http://www.lasvegasrealtor.com/stats/statindex.htm
I'm signing up for Geoff's newsletter - this speech was rubbish.
I'll sign up to laugh at the "risks are quantifiable" part, or any suggestion that investors are using their brains right now. But I think the "liquidity is confidence" statement is largely on the money (but it's really not an original statement). That's why I constantly argue that psychological factors are crucial in understanding the nature of economic downturns... especially when it comes to their abruptness.
OK Tanta, here's a hanging curve ball...want to translate "making certain our business data is secure"?
Oh, give me hard one. C'mon.
March 5 (Tantaberg) -- Fremont General Corp., whose ass is in a serious sling with the Federales, put some of its residential loan staff on paid leave "until we find out how far down in this company the mismanagement has spread," and said it won't make any more subprime mortgages, coincidentally at the same time it won't have any more staff to make them with.
The financial services holding company said worthless mouths to feed were sent home, according to an e-mailed statement today.
Managers and operations people ``are continuing to work today--well, insofar as the management actually ever did any work, you know what we mean here--and are making certain that nobody got out of here with data we don't want anyone to see and that our internal auditors are taken care of.'
Dryfly
In short, the push of the rich to soak the poor and middle class to acquire more riches by owning a corrupt government has left them no better off and possibly worst.
Intangible investments which are barely understandable are the only ones with real return. But in gutting the government, these elites have eliminated their only protection from folks who want to loot.
BOSTON (MarketWatch) -- Home sales haven't rebounded dramatically so far this spring selling season, which suggests a hoped-for recovery in the housing market won't play out as soon as some had expected, Toll Brothers Inc.'s chief financial offer said Monday. When asked about the potential fallout from the troubled subprime mortgage market, CFO Joel Rassman said it's not a big part of Toll's market, but that subprime jitters have "a big psychological impact" on homebuyers. During a Web cast from an investment conference sponsored by Raymond James, Rassman said headlines on the subprime market "make customers nervous" and added the housing market could feel significant impact in the next month, such as foreclosures and more speculators quitting the market.
Can someone explain to me what took place today ?
Every single PUT option I have is up. Even puts on WM, WFC and WB.
Is it the fear factor ? (what option traders called implied volatility ?)
I wonder if should sell some puts or keep them ? I am sure more bad news is comeing but I wonder are we at the climax of fear ?????
AC - As hard as it is to believe, it is the same Tennis_8.
I am mostly here to learn about the housing market of which I know practically nothing - never believed in real estate as an investment. Alway saw it more as an sink-whole.
I sold my condo in June 2005 before my move to VA and am looking to buy again someday. The market was so crazy in mid 2005 that I couldn't possibly buy another home.
I share the general concern about the housing / mortgage markets and I admit that I don't understand the complexity of the issues discussed here. My quibble would be that I am skeptical that it is going to sink the overall economy. I could of course be wrong on that.
Hey Tennis,
That's actually one of the most sensible posts I've seen on here.
I think the main reason you'll see people react badly toward people who are bullish here is because alot of those bullish posts fall into the "drive by shooting category" and ignore or fail to address some of the very sensible (IMO) bearish arguments made on this site.
I would strongly recommend going back and looking at some of CRs old posts. I think he makes a very sober and well-tought-out case for concern. And I don't think he has any deep-down bearish bias, which makes his arguments far more compelling to me.
yal wrote: "but I wonder are we at the climax of fear ?????"
Being a long-only investor, I know the "climax of fear" when I wake up at 4 AM worrying about my long positions and thinking it would be wise for me to sell stock first-thing when the market opens.
That's how I, as a long-only investor, know when to BUY!! It's true and it does work! If you want to know why it work, just ask.
As a short investor, I guess that when you wakeup at 4 AM and think enthusiastically that you should add more "puts", it would be time to sell them. But I wouldn't know for sure.
"liquidity is confidence" statement is largely on the money
Except confidence alone still won't buy you a latte.
That is where this thing is so comical & why the talk by - A FED GOVERNOR - is, if not comical, SCARY.
There is a 'physical' element to wealth - even highly leveraged & rapidly flowing wealth. Psychology, emotion, bravado, confidence... all play a part in accelerating or decelerating the flow... but it is more than just 'psychology' that builds a housing development.
And believe me when the liquidity goes away - we'll recognize this. It won't require a Fed speech to tell us.
As far as I'm concerned his 'confidence' definition is just more 'dark matter'.
"liquidity is confidence" statement is largely on the money
Except confidence alone still won't buy you a latte.
That is where this thing is so comical & why the talk by - A FED GOVERNOR - is, if not comical, SCARY.
There is a 'physical' element to wealth - even highly leveraged & rapidly flowing wealth. Psychology, emotion, bravado, confidence... all play a part in accelerating or decelerating the flow... but it is more than just 'psychology' that builds a housing development.
And believe me when the liquidity goes away - we'll recognize this. It won't require a Fed speech to tell us.
As far as I'm concerned his 'confidence' definition is just more 'dark matter'.
Well I'm an instant fan of that new press agency Tantaberg.
I should collect some juicy headlines from Bloomedberg and friends as the press tries to put the best light on the continuing plunge.
"liquidity is confidence" statement is largely on the money
Except confidence alone still won't buy you a latte.
Sure, but excessive confidence will get somebody to loan you the money for the Latte, even if you've never earned a dime in your life... so long as that confidence still exists.
Re: graduation rates. I'm not saying what we have is great, but see this:
Rethinking high school graduation rates and trends
I don't know this site's bia, if any.
OK Tennis_8 since I want to add more puts I must ask "why" ?
( my problem is that I never wake up at 4 )
Sure, but excessive confidence will get somebody to loan you the money for the Latte, even if you've never earned a dime in your life... so long as that confidence still exists.
That 'somebody' has to have something... if there is more 'confidence' than what the somebodies have the lattes remain unsold.
That has ALWAYS been the problem with only focusing on the psychological dimension of liquidity... there has to be some actual 'there' there.
When I took marketing as part of my grad school program, one of the lecturers asked for a definition of 'demand'... and a huge ruckus broke out between the folks saying it was desire to consume vs those saying was ability to purchase.
Eventually the lecturer 'blew the whistle' and said it is both... He said demand is a buyer (or buyers) with BOTH the ability & the motivation to buy.
Liquidity has a similar character... pools of wealth being put into play by motivated market actors. Confidence is one of the major factors driving that motivation (along with greed, hunger for status, etc.)
Pressure times flow = liquidity.
I've changed my mind. It's hogwarsh.
TANTABERG. I like it. Sounds apocalyptic. You should have a regular column. "Tanta's Periscope" sounds nice.
EVIDENCE HOUSING / CREDIT CRASH WILL NOT AFFECT THE GENERAL ECONOMY -- NOT
Bassett Furniture annnounces plant closing; lowers Q1 sales and earnings (BSET) 15.02 -0.19
Co announces plans to cease operations at its wood manufacturing facility in Bassett, Va. The closure of the 323,000 square foot facility is planned to begin over the next 60 to 90 days and affect approx 280 employees or 15% of the Company's workforce. The co plans to source the majority of the products currently produced at this facility from overseas suppliers, to continue to produce certain custom bedroom products domestically and to discontinue providing certain slower selling items. Bassett also announced today that its Q1 earnings will be negatively impacted by lower sales levels and reduced margins, compared to the year ago period. Q1 sales for the three month period ended Feb 24, 2007, are expected to be approx 16-18% below the same period last year and approx 5-6% below the fourth quarter of 2006.
This shortfall is primarily due to continued soft furniture retail conditions which have impacted both retail sales and wholesale shipments. The decline against the same period last year was also partially due to a decline in year over year wholesale shipments to the Army/Air Force Exchange and to the sale of the Company's Weiman operation at the end of April 2006.
Sorry in advance for the engineer-speak folks.. Your eye's should un-glaze in a moment or two.
Dryfly "Pressure times flow = liquidity."
So by that definition, dryfly, you will have an increase in liquidity (cash flowing in the economy) when either demand is high (large pent-up consumer demand and ability to consume and borrow regardless of interest rates) or interest rates are low (high monetary pressure (I'm assuming an inverse pressure effect here from the prevailing interest rates, i.e., high interest rates = low monetary pressure, low interest rates = high monetary pressure)).
You might also want to add to that model the resistance effects of increased lending standards, which would act as a partially closed water valve or electrical resistor, dropping the effective "money pressure" the consumer would see (if you can't qualify, you can't borrow it, even if the rates are low). I'd say decreased consumer demand/ability compounded by these increased resistance effects (lending standards) are probably what we are seeing currently.
yal - Make you a deal. I'll tell you when I awake at 4 AM worrying about my stocks, thinking that I have been a big fool and thinking that I should sell. Then I will buy common stock and you can cover your Puts ;~)
No, I am being dead serious. Sense an investors greatest weakness is the Herd Instinct: to think like the Crowd and do like the Crowd then with regard to Stock: one should do the opposite of ones emotions.
When one is scared about buying stock (the news is bleak everyday, friends are selling, market going down endlessly, rallies failing, etc), one should buy especially when one awakes early in the morning worried about one's stock holdings.
When one is enthusiastic about buying (the news is good, friends are talking about their winnings, the market keeps going up), one should resist the temptation. Bottoms are much easier to spot because they a briefer and more emotionally disturbing. Tops take much longer to unfold and are more difficult to time.
Warsh married into the Estee Lauder family.
Sorry in advance for the engineer-speak folks.. Your eye's should un-glaze in a moment or two.
LOL. Ya they'll live.
Warsh married into the Estee Lauder family.
Well that surely qualifies you to be a Fed Governor... Besides I suppose the FEMA job was already taken.
Warsh married into the Estee Lauder family.
Then he must know all about which color of lipstick goes with which pig.
Nothing like a meritocracy at work. Of course the merit here is based on where your family is in the social register, passing the political litmus test, and being suitably socially and politically connected. It also seems to help that you went to an ivy league school.
Mustn't grumble though, this worked well for the late Roman Empire. (If you ignore those little deviances like Nero.)
This might need some minor adjustments when we consider Arnold:
Of course the merit here is based on where your family is in the social register, passing the political litmus test, and being suitably socially and politically connected.
Now Warsh could be a David Hume who had his Treatise done by the age of 21, so I should be more forgiving of Warsh who is all of 36 and has atleast a dozen years working in this punishing world....of financial banking, fleecing up several million/year with the same skill set of those who were early ins on MSFT...sheer talent...
See, my suspenders just don't work for Warsh.
Looks like all the excitement is over in Asia.
Most exchanges are in the black.
Major World Indices - Yahoo! Finance
Looks like all the excitement is over in Asia.
For now.
The real story is what's going to happen to the carry trade if the USD keeps falling against the yen...
Charts... look at it over the last five days.
No, I am being dead serious. Sense an investors greatest weakness is the Herd Instinct: to think like the Crowd and do like the Crowd then with regard to Stock: one should do the opposite of ones emotions.
The "Herd Instinct" is only the act of taking information at face value without verification. Herding normally works. If it didn't work, animals wouldn't have evolved with that ability. Occasionally though, herding leads to bad results. Ask the buffalo that the Native Americans would stampede off cliffs. Now, since the markets are like a game of poker, it is generally wise to be suspect of herding information. If you don't think there are people out there trying to herd you off a cliff then you should probably read more often.
How do you resolve The Trend is Your Friend and Be A Contrarian? Easy. You need to understand when you are being herded off a cliff and break from the herd. It's actually not easy, which is why it helps to gather as much data and do as much analysis as possible. Otherwise, guess who ends up holding the bag? Yep, the last little buffalo to realize that there is a cliff just ten feet in front of him.
In the black?
Looks to me like, "slightly less in the red" would be a better description.
Tennis 8: we have a deal !!!
So if understand you correctly as soon as everyone get really worried I should sell my puts.
One caveat: I think the banks like FED, DSL etc.. Siatuation has nothing to do with public perception. I think they are in trouble. As far as their Puts: The price of the put is about 2/3 fear and 1/3 economic value. The lower the strike price the fear factor is higher percentage. I have Puts on WB and WFC (bought them in a $0.05 and $0.10) just out of thinking that at some point fear will reach these stocks as well. These puts are now in $0.40 and $0.80 and this is why I am beginning to think fear is high.
Is it too high ? at least for short term I think so and I expect my puts to go lower today considerably but not selling yet. I wonder if this is a good time to add more shorts and puts on FED and DSL. Tough call. I am sure FED and DSL will be up today but what will the next two weeks and 3-6 month will do is anybody's guess. The news that would come from them has to do with their internal situation and not based on fear. So the questions I ask myself:
1.\tHow bad is the situation internally with those neg-arm ?
2.\tCan they do something to correct it (Fed lowering interest rates, banks allow re-fi to keep borrowers paying even a tiny amount)
3.\tHow long can those banks hide the truth abbot their imaginary neg-arm profits from their quarterly reports ?
"Warsh married into the Estee Lauder family.
Then he must know all about which color of lipstick goes with which pig.
Tanta | 03.05.07 - 8:22 pm"
Oh Tanta that was BEAUTIFUL.
The benefits of greater liquidity are substantial, through higher asset prices...
To assert a priori that higher asset prices are a benefit is stupid. The asset price is the COST a buyer pays to secure future returns. Higher asset prices imply a lower return on investment for purchasers of the asset. For every dime that a seller makes because an asset price is higher, the buyer pays an extra dime purchase the asset. It is a zero sum game. The idea that asset prices can be divorced somehow from dividends and somehow grow to the sky is at the root of all speculative bubbles.
Even a blind hog finds a truffle now and again. I wouldnt dismiss Mr. Warshs comments so quickly without considering the range of issues he raises. We ought to further note that the Fed staff would certainly have done the homework and theyre pretty darn competent. For example one of the excerpts continues:
My goal in proffering this proposition is to improve the discourse by reducing the different notions of liquidity to its most fundamental feature. This exercise may also serve as a healthy reminder: If unmoored from fundamentals, confidence can give way to complacency, complacency can undermine market discipline and liquidity can falter unexpectedly. If, to the contrary, confidence is justified by real economic determinants, liquidity can flourish.
My point(s) being that it would pay you to at least skim Warshs remarks and decide, carefully, where and why you disagree. His outline of the economic and financial developments, of the growth of liquidity and the mechanisms and instruments is spot on. I happen to disagree with his conclusion, which are too sanguine for my test. Based on some other readings enormous liquidity has been driving the markets these last several years and, in addition to China & Japans excess balances, petro-$ recycling and slow growth, a key and critical source has been highly leveraged new instruments. Put that another way if the implosion were seeing in the sub-prime markets so knowledgably dissected here either spreads or is representative of similar risks then a loss of confidence will lead to a credit crunch across many markets which will be leveraged down as much as it was leveraged up.
Bill Gross made the same points much more elegantly and eloquently in his Dec06 newsletter:
PIMCO - Investment Outlook- December 2006 "Reality Check" and reinforces his point in the most recent one. The Economist made a similar set of observations in early Feb.: Premium content | Economist.com . And this morning Jim Jubaks column put it all together in a much simpler framework for the rest of us in Drowning in Cheap Money: Drowning in cheap money - MSN Money .
CR and his blog community have done a wonderful and prescient job of diagnosing the housing market, the associated financial market and the links to the broader economy. Im just wondering if we shouldnt look at the contagion risks.
I suppose we should thank you for your eloquent post Dave esp after this:
CR and his blog community have done a wonderful and prescient job of diagnosing the housing market, the associated financial market and the links to the broader economy.
which should surely include your post nomatterwhat credentials you have to adjudicate our somewhat recreational diagnoses.
Pats on the back allround.
Now about giving Warsh a 2nd look and considering that the views he expressed may not be merely his own quest for Economic Sage of the Month, but possibly representing the views of his so competent staff (some of whom may have suffered a proof-reading) that he fails to acknowledge --or as you and not Warsh put it:
We ought to further note that the Fed staff would certainly have done the homework
Would you say "liquidity is confidence" is the kind of gem that chases technicians to the computer for confirmation or something more academic, more sagacious and beyond mere empirical research? Were those of philosophical bent on the edge of their chairs waiting for further distinctions in this conceptual advance?
I bet the proof readers begged for anonymity.
Calmo - an interesting question but thanks btw. Actually, w/l defending the bare phrase, I might so say. In the CONTEXT of the total speech. He's actually pretty careful to build it up from traditional def. Need to think more about how to interpret and put but here's a take: liquidity is the ability to readily exchange and transfer assets on one hand and the ability to increase the pool of liquid funds on another. As risk premiums decrease due to an increasingly, or so percieved, stable macro-environment then induced liquidity is increased. When further that same percieved risk reduction leads to increased leveraged investments, increases in derivatives as 'insurance' [with the resultant moral hozard risks beloved of information economists and born out by New Orleans] we have a world where 'base' liquidity is doubled, trebled and more by percieved risk reduction. Which is fair to equate to increased confidence in risk management and macro-policy controls.
You'll have to judge for yourself if my transliteration is fair and accurate - still struggling but... - also note my comment that I wasn't as sanguine as Warsh. Always loved that word 'cause it really can be taken either as not exited about or expecting a bloody end. In that sense I'm very sanguine. In fact it seems likely that the existing risk expansion in sub-prime has been our pre-occupation and is likely to wend its' weigh slowly thruout other major assets classes.
"When the tail outcomes are either highly improbable or, at the very least, subject to reasonably precise measurement, the conditions are ripe for liquidity to be plentiful."
In other words life has been under the Greenspan put since LTCM, but since it never really existed to the extent Wall Street hoped, you had just get ready for a real yield curve and volitility again being a real factor in markets.
This is the fed staff putting the warning shots out to the world that things are going to change, and abruptly at that. Shocking news that markets might have nondifferential adjustments that lead to a "fat tail distribution" and possible counterparty risk. Nice mentioning of the fact the fireman didn't even get a call when Amaranth went down in flames- it was too small a blaze.
" Liquidity conditions could, in theory, lead to lower-than-justified risk premiums that stimulate aggregate demand or otherwise generate excessive inflationary pressures." Umm, tacit admission there was a housing bubble, and it was smoothed out of the cpi for convenience sake, and we didn't want to stop the party until it was burning out naturally.
The last two paragraphs are basically a veiled restatement of the McChesney maxim the central banker's role is to take away the punchbowl before the party gets going- and subtly point out the last fed's failure to do so.
"An important source of strength has been financial innovation, and while we have yet to see how some new products will play out in a more stressful environment, there almost certainly will remain a greater dispersion and insurability of risks."
Kinda reminds me of the viability of portfolio insurance, with that lesson of 1987 humming along in the background. Fat tails and black swans.
Ugh. They are supposed to cloth it all in Greenspanese, not clear warnings that speculations end in tears. Reading between the lines of this does not make for a good nights' sleep.