Comments on: FCIC report: 10 causes of the financial crisis http://blogs.reuters.com/james-pethokoukis/2011/01/27/fcic-report-10-causes-of-the-financial-crisis/ Politics and policy from inside Washington Sun, 07 Apr 2013 21:23:48 +0000 hourly 1 http://wordpress.org/?v=3.4.2 By: Subtle http://blogs.reuters.com/james-pethokoukis/2011/01/27/fcic-report-10-causes-of-the-financial-crisis/comment-page-1/#comment-10693 Subtle Fri, 28 Jan 2011 16:04:44 +0000 http://blogs.reuters.com/james-pethokoukis/?p=5675#comment-10693 The list of "causes" should have included comparisons to previous great financial manias. This would have observed that since the 1825 example the final phase ran some 12 to 16 months against an inverted yield curve. The problem during such a boom is not rising interest rates. This confirms that the boom is on. The problem arrives when the curves reverses to steepening, with T-bill rates declining. This fateful reversal started in May 2007, which was the 15th month of inversion. The rest, as the saying goes, became history. There are two "rules" that worked. Short rates plunge during the initial bear market and economic contraction. The notion that "cuts" in the Fed rate will reignite a boom is not supported by history. The other "rule" is that the post-bubble recession starts virtually with the bear market. Using NBER determinations, the 1873 bubble ended in September and the recession started that October. The 1929 bubble ended in that September and the recession started that August. The 2007 bubble ended in October and the recession began in that December. There are other "rules" but that would take a lot of space. The list of “causes” should have included comparisons to previous great financial manias. This would have observed that since the 1825 example the final phase ran some 12 to 16 months against an inverted yield curve.

The problem during such a boom is not rising interest rates. This confirms that the boom is on. The problem arrives when the curves reverses to steepening, with T-bill rates declining.

This fateful reversal started in May 2007, which was the 15th month of inversion.

The rest, as the saying goes, became history. There are two “rules” that worked. Short rates plunge during the initial bear market and economic contraction. The notion that “cuts” in the Fed rate will reignite a boom is not supported by history.

The other “rule” is that the post-bubble recession starts virtually with the bear market. Using NBER determinations, the 1873 bubble ended in September and the recession started that October. The 1929 bubble ended in that September and the recession started that August. The 2007 bubble ended in October and the recession began in that December.

There are other “rules” but that would take a lot of space.

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