[Dogpile]

<<But is this an unprecedented act?>>

repos are not that uncommon. the size of this one though was biggest since aftermath of 9/11.

<<Only because real estate sector problem or they think it's expected to move into other sectors?>>

I don't know answer to what the fed thinks. Some have postulated that the Fed might have significant information that isn't public that is really bad but containable if there isn't a panic from here.

But the mortgage sector has somewhat stopped working properly. There was news on Friday that Countrywide was citing. Countrywides business is to loan money to investors, roll them up into bonds and sell them to investors of such -- bond funds -- then go do it again. But bond funds aren't buying mortgage bonds right now due to a loss of confidence. So Countrywide is stuck with $1 billion in loans that they can't sell. What does Countrywide do? For one, they stop making new loans. So the system kind of halted there last week and the fed had to do something.

The real question is how much of this is loss of confidence (perception) and how much of this is just that we are sitting on major trouble. Nobody really knows the answer to this. There is a good argument that home prices are high but not going to freefall from here because the job market is good and defaults therefore aren't going to take off and spiral out of control.

All the fed can do is try to inspire confidence among the participants to go back to each doing their role.

The doomsday scenario is that something now triggers to cause the US dollar to start to nosedive and all those foreign countries who hold loads and loads of US bonds start to see their portfolios dropping and sell those bonds to get out of the US dollar. This would cause interest rates to RISE more --- which would obviously be a disaster for bond mangers who are already getting increasingly risk-averse. The key is confidence. Confidence between banks, confidence by foreign countries like China in the US system.

I was in the business during the last doomsday -- we got nailed with recession, then 9/11 -- then we go through all that and just as you are starting to regain confidence that we will persevere -- the Enron corporate fraud news hits... the doom and gloomers come out from the woodwork with dire predictions. some try to be optimistic and then in June 2002, the Worldcom fraud hits -- it felt like the system was rigged to go down at that point... Bush starts talking tough on Iraq and the next terrorist attack could happen at any time. CFO's and CEO's were now all considered con-artists and you were considered crazy to trust anyone. Elliott Spitzer was on a crusade to expose everyone. it was like getting hit with a baseball bat over and over again -- anyone who tried to be optimistic about the future was letdown repeatedly.

I am not saying that this needs to be repeated. I am just giving an example of how loss of confidence can snowball....