The problem is not so much in the stockmarket, which was buoyed this week by a drastic interest-rate cut by the Fed and a move to rescue bond insurers.
The trader at Lehman Brothers who priced stock-market-crash insurance didn't know the trader at Harvard Management who priced the insurance against drastic interest-rate changes, and he didn't know the trader at O'Connor and Associates who priced the insurance against the dollar's losing a third of its value.
In many other cases, operators offer drastic cuts in the interest rate or other deals, which PennyMac can afford, given that it paid so little for the loans.
If drastic cuts in interest rates work too well, that will fuel inflation.
The Dow Jones index fell 301 points or 3.3% to 8837, while the FTSE 100 closed down 5.7% in London despite a drastic cut in interest rates.
Analysts now say that the central bank's move last Friday to restore confidence by encouraging banks to borrow directly from the Fed at a lower cost has had only limited impact so far and that the Fed will need to take more drastic action by cutting its benchmark interest rate soon if it fails to see more progress.
Triggers for a drastic market correction — such as an interest rate shock and steep stock prices in the US, overheated housing market in Canada, geopolitical events in the Middle East and Ukraine, economic slowdown in emerging markets, and fears of recession in Europe — are all there, yet market volatility (a measure of how widely prices swing) has been eerily low, said Hollands.
Despite huge government rescue programs and drastic reductions in the Federal Reserve's benchmark interest rate, borrowing costs for companies have remained stubbornly high.
Analysts were closely watching Thursday's data to see whether interest rate increases or more drastic action would be required to prevent overheating.
A less drastic reform would allow the fund to extend loans to wayward countries, but at a higher interest rate.
