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