Fed VP concerned with meat supply, not money supply

NY Fed Vice President Joseph S. Tracy waxed philosophical today at the Westchester County Banker's Association, as he weighed the nomenclatural merits of "The Panic of 2007" versus "The Great Recession." While he educates us on the Knickerbocker Trust, the shadow banking system and the similarities between the recent asset bubble in housing and the bubble in copper preceding the Panic of 1907, at no time are we treated to a discussion of the Fed-induced subnaturally low interest rates in 2003 that led to an explosion in money supply--a necessary condition precedent to the greatest bid up of risk assets and relaxation of diligence standards in modern times. For that matter, the term "money supply" did not garner a single mention, though a close derivative did:

Why did the point at which house prices peaked and started to fall in some housing markets spark a run on the repo market? Additionally, why did the problems in subprime mortgage assets spread quickly to other assets? Gary Gorton uses the analogy of an E. coli breakout.12 Suppose that E. coli is thought to have infected a small quantity of the country’s meat supply. The difficulty is that no one knows which batches of meat have been infected. If eating infected meat will cause the individual to become very sick, then the natural reaction is for everyone to immediately stop eating meat altogether. This will continue until the entire meat supply has been recalled and inspected. Subprime mortgage defaults were the E. coli that infected the financial system. Some mortgage assets would lose significant value as a result, but it was difficult to know which mortgage assets were "infected" and who was holding these assets. The natural response was to pull back from these assets.

File under "your central bankers at work."