The Federal Reserve announced this morning several measures to deal with the current liquidity crisis on Wall Street. It is creating a new Term Securities Lending Facility (TSFL) that will lend Treasury securities for 28 days as opposed to overnight under the current program. The key element of this program is that it will accept residential mortgage-backed securities (MBS) as collateral.
The Fed is also taking coordinated action with the other major central banks: The Bank of Canada, the Bank of England, the European Central Bank and the Swiss National Bank. It has also authorized increases in the currency swap lines with the European Central Bank and the Swiss National Bank.
These actions are significant for several reasons:
- The Fed, by accepting MBS as collateral, is now attempting to inject liquidity directly to the area that is the source of the credit crunch.
- It is extending the term in order to give additional confidence that funding will be available for a longer period of time. No one will lend unless they are certain that funding will be available. This addresses the issue.
- The Fed is taking action on a global basis with other central banks. This an additional measure to build confidence in the financial markets.
The Fed is truly acting as a lender of last resort. Will this be enough to stabilize the financial markets? For now, stocks are up strongly across the board. However, only time will tell.
These actions can work if the Fed views this as the first of a series of actions to deal with current financial problems. They were not created over night and will take time to resolve. The Fed must be perceived as an active participant in this process, not an observer. I have said that much of the problem with the Bernanke Fed has been the perception of it being behind the curve, lessening the effectiveness of its actions.
Hopefully, these actions represent only the initial step in dealing with the current credit crisis.
Doug Roberts is the Founder and Chief Investment Strategist for ChannelCapitalResearch.com. He previously held executive positions at Morgan Stanley Group and Sanford C. Bernstein & Co.
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Reader Comments (Page 1 of 1)
3-11-2008 @ 1:47PM
David Huston said...
Sounds to me like the initial stages of a massive Federal bailout of financial institutions that made a host of unwise investment decisions that they can't now remedy. Too bad the Administration isn't equally concerned about homeowners about to lose their houses through foreclosure.