Federal Reserve and Monetary Policy: Elvis has left the building

The Federal Reserve has just come out with CREDIT RISK MANAGEMENT GUIDANCE FOR HOME EQUITY LENDING

Note, this is for guidance note requirements.

There are rumors of hedge funds in trouble because they were caught off guard when Ford and GM's bonds were down graded to junk. It doesn't take much to scare off new buyers of securities. It also doesn't take much to remove old buyers from the bond and credit derivatives instruments. The Federal Reserve has released a survey of credit risk management, see The January 2005 Senior Loan Officer Opinion Survey
on Bank Lending Practices

and Greenspan has made a comment on risk management, see Remarks by Chairman Alan Greenspan Risk Transfer and Financial Stability To the Federal Reserve Bank of Chicago's Forty-first Annual Conference on Bank Structure, Chicago, Illinois(via satellite) May 5, 2005

I think it is too late. The removal of the carry trade has already cause trouble in the derivatives market. See Federal Reserve and Monetary Policy: Federal Reserve's Challenge for my reasons why I think that the problems in the derivatives markets are going to blow through the Fannie Mae and Freddie Mac back door.

It also doesn't help if the US can not attract the foreign investments to cover the trade deficit. $45.7 billion, down from $84.1 billion, but not enough to cover the $54 billion trade deficit.