Give the Fed an A+

Since 1987 when St. Paul the Tall left the Fed, there has been no one with less respect for the Fed than I.

That's changed.

BERNANKE
Bernanke has saved the US economy from a disaster of immense proportions. Had the credit system melted down, it would have taken commercial bank lending with it, and along with that, the money supply would have collapsed. If the money supply fell, the economy would also face depression, with employment, income, production and tax revenues falling precipitously.

The purchase of hundreds of billions of dollars worth of bad loans by the Fed has postponed that event. As long as the credit markets stabilize, as they are now doing, the US economy is safe.

COLLAPSE IN CREDIT
I never saw this coming. Not at these magnitudes.

As regular readers of this bulletin will remember, and can read in the archives, I advocated getting out of the adjustable rate business back in 04. That advice was prescient far more than I understood at the time.

It seems that everyone in the US had an adjustable rate mortgage, with little equity, and bad credit. But who knew? I didn't.

LESSONS LEARNED
The lesson is prudent asset and liability management. Match the book, and extend liabilities when the Fed starts raising rates.

None of Paterson's clients have been harmed - in the least.

In fact they are all in good shape with short term assets and liabilities in money market arbitrage, lengthened liability maturities, and solid spreads in new business.

This was a close one, believe me.