The dollar gained on the higher yielders when trading began this week as S&P futures declined right from the open, but then something interesting happened.
At 01:00 EST, S&P futures declined to a 30 minute trend line extending upwards by connecting the low from the Feb. 05 10:00 EST candle to low of the Feb. 06 08:30 candle and then proceeded to touch and find support nine times over the intervening twenty two 30-minute segments, including three times after the cash market opened. During that time, the dollar fell against the higher yielders, with the pound hitting the 100% retrace of the last major downswing, while the aussie surpassed its 100% retrace line and the euro hit the 61.8 retrace of its last major downswing.
The S&P finally closed below the line on the 14:00 EST candle. The euro was at the 50% retrace line (1.3015) of the downswing between Jan. 28 and Feb 02.
John Taylor, author of the Taylor rule regarding monetary policy and a professor of economics at Stanford had an opinion piece in today's WSJ. According to Professor Taylor, "government actions and interventions -- not any inherent failure or instability of the private economy -- caused, prolonged and dramatically worsened the crisis."
The Taylor rule stipulates how much the central bank should change the nominal interest rate in response to divergences of actual GDP from potential GDP and of actual inflation rates from a target inflation rates. While not strictly followed by the Fed, it is something they look at closely.
"Monetary excesses were the main cause of the boom," he said. "The Fed held its target interest rate, especially in 2003-2005, well below known monetary guidelines that say what good policy should be based on historical experience. Keeping interest rates on the track that worked well in the past two decades, rather than keeping rates so low, would have prevented the boom and the bust."
Other factors were involved as well: extensive securitization, lax underwriting standards and poor regulatory oversight, among others. However, government helped prolong the crisis because policy makers misdiagnosed the crisis as one of liquidity, and prescribed the wrong treatment.
In essence, today's crisis turned out to be one of solvency, exactly what economist Nouriel Roubini wrote early on.
Professor Taylor believes other factors besides the collapse of Lehman Brothers was responsible for the sharp intensification of the credit market freeze-up last Fall. "The realization by the public that the government's intervention plan (the TARP program) had not been fully thought through, and the official story that the economy was tanking, likely led to the panic seen," he said, although such effects were "likely amplified by the ad hoc decisions to support some financial institutions and not others."