Fed trying to break the back of the credit crunch
March 11, 2008
By: 
Arohan
Category: Current Events, Economy
Fed in a surprise move today announced $200 Billion worth of liquidity injection in the credit markets
This fed action is different from what it has traditionally done and is clearly in response to a situation that is different from traditional recessionary period. And therefore it is more likely to succeed. Cutting interest rates helps businesses secure loans cheaper and can jump start a slowing economy, unless of course, if the banks are so unsure of their balance sheets that they are afraid to lend at any price (and the market so unsure of the asset quality that it is unable to price securitized debt). The latest fed action helps by substituting Treasuries for other debt ‘collateral’ that may include mortgage backed securities and thereby removing some of the uncertainity in the credit markets.
Some in financial media are reporting this as Fed pumping cash in the economy (including the article linked above). There is a better way of looking at this. It is a loan against a collateral (a collateral that is otherwise useless under current conditions). Think of it as Fed trying to restore the original value of some of the securities that people were not willing to touch. This is just a liquidity enhancement operation.
The loan comes due in 28 days. Hopefully the banks that avail of this facility are able to make good use of it in this time.
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March 12th, 2008 at 7:52 pm
A few quotes worth considering in light of the unprecedented $200 billion injection - “The fed’s measures are nota panacea, more like an aspirin” for a bad migraine.
Citigroup said “credit concerns are likey to persist and averting a drown out recession is becoming increasingly challenging.”
My guess is the 28 day liquidity will put the stock market in a trading range for the next 3-4 wks. That is about what happened when the Fed introduced TAF on Nov 26 - a trading range was established for 2-4 wks.
Q4 07 earnings season was particularly rough for equity investors will Q1 08 be any better? $200 billion is pretty darn expensive aspirin, will it last for more than a few weeks? I never knew an aspirin to cure a migraine. What would cure the migraine would be to clear out all the writedowns that need to eventually be taken, then investor migraines will dissipate in earnest and be accompanied with an uptick in sentiment.
John Bougearel
SuccessfulTradingTips.com
March 12th, 2008 at 9:19 pm
Thanks John for pointing this out! The banks have a very small window in which they need to start using the facility and restructure their portfolios and try to get back to business as usual. One would hope that they would be aggressive in this respect. I do not think the Fed is generous enough to extend the window or open another window like this in the future if they do not see the banks acting
March 16th, 2008 at 7:29 am
Only primary dealers can access the window and it seems that banks are not in a lending mood. E.g. JPM calling TMA loans. The fed needs to give them a stern talking to.
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April 16th, 2008 at 3:38 pm
The Fed isnt going to be able to do a thing about the credit crunch, we havnet even begun to hit rock bottom yet.
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