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First
Quarter 2008
The Federal Reserve escalated its intervention in financial markets
in the first quarter as an intensifying credit crisis threatened
an already slowing economy. Credit concerns spread from the relatively
small US subprime mortgage market to a broad array of other securities.
Banks, worried about counterparty risk, withdrew liquidity, triggering
forced sales at hedge funds, scuttling private equity deals, and
helping to push the nation’s fifth largest investment bank to the
brink of collapse. The Fed responded by aggressively easing rates
and super-sizing its liquidity injections. It undertook the unorthodox
step of helping to orchestrate the sale of Bear Stearns and set
precedent by lending to investment banks and accepting a broader
range of collateral, including mortgage-backed securities.
The Fed’s massive efforts quieted worries about systemic
failure and brought some calm to equity markets. But so far, these
measures have achieved only limited success in narrowing spreads
and lowering mortgage rates. Liquidity concerns on Wall Street have
eased, but solvency issues in the financial system remain. Asset
writedowns will continue to erode bank balance sheets, constricting
the availability of credit and increasing its cost. Neither the
Fed’s innovative maneuvers nor the $168 billion tax rebate package
directly address the problem at the epicenter of the credit crisis:
falling house prices. As the decline in house prices accelerates,
so too, do the rates of default and foreclosure, exerting even more
pressure on prices. Direct policy assistance to troubled homeowners
and lenders may be required to bring some stability to the housing
market and steady credit markets. Election year politics increase
the likelihood that such unconventional steps will be taken.
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Fourth Quarter 2007
Third Quarter 2007
Second Quarter 2007
First Quarter 2007
Fourth Quarter 2006
Third Quarter 2006
Second Quarter 2006
First Quarter
2006
Fourth Quarter
2005
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