These short-term financing arrangements (TAF & TSLF) are an attempt of the Fed to redirect liquidity from ordinary channels (fed funds and the like), to the short-term funding of banks and dealers with acceptable collateral. Acceptable collateral varies, with differing haircuts depending on the collateral and the financing program. At this point, Agency MBS and AAA whole loans (not on review for downgrade — presumably that means no negative outlooks from any ratings agency) are encouraged.What I find most interesting in all of this how little true liquidity the FOMC has injected in this cycle. The monetary base is flat. What this looks like is an attempt to selectively reflate the economy — help the banks and dealers, but keep total liquidity close to fixed.
And, in the face of this, total bank liabilities keep expanding at a 10%+ clip. It almost feels like any source of liquidity is good liquidity to the banks. Of course, they get a lot of it from the FHLB, which has been the big unconstrained lender in this cycle. Fannie and Freddie may now be able to make larger loans, which loosens up hosing finance a bit, but only the FHLB has the balance sheet to do so in this cycle, and they have done it. Call them the “shadow Fed.” But even their balance sheet is finite, and they are only implicitly backed by the US Government, like Fannie and Freddie.
So where does this leave us? Muddling along. Even the redirection of liquidity will not get the banks and dealers too jazzed, because they are only short term measures, with uncertain long-term funding availability and cost. More attractive than the “free” market for now, but that’s about it.
The Fed is trying some clever ideas. I have just two concerns — what happens when you unwind them, and are they perhaps too clever? There may be unintended consequences…
David – They are going to keep this facility going as long as necessary. They will increase it if needed. They may actually buy assets.
This provides an alternative approach to more aggressive rate cuts. They are attempting to stop the death spiral resulting from FAS 157 mark to market prices — a good idea that makes little sense when there is forced selling into illiquid markets.
What they are doing seems responsive to your past criticisms.
This is a wind up that will unwind like a tornado with massive devistation all around. This is not physic class where one can freeze water and then thaw it. We hane had a temporary thaw with the foolish move of lowering the fed rate 75 basis. We are near the end of the rope with little to hold onto. what is the next move? Dollar that 50 cents and a rate of zero????
How does this redirection help me? My mortage is a 20 year fixed at at 5.25. This does not put any money in my pocket. It does not lower over charged credit card holders with 21% rates. It helps the ultra rich get richer as the government opened up a yield spread. Those hedging on this made huge money today. The government need to shut this all down now!! They need to take direct action not indirect action. Fund Fannie Mae as Jim Crammer wants although I do not agree with him as this is my hard earned moey paid in taxes with my blood and my sweat. Correct the foreclosure situation and let the rest sort itself out. The real issue is loss of homes not loss of finicial institutions. Does anyone care the Bank of New England is gone? No. They were liquidated in the 80′s for foolish loans. The real issue is home loss. MBS need to be fixed and fixed now.