The Federal Reserve, trying to calm financial turmoil on Wall Street, announced Friday that it will provide liquidity to help bolster U.S. financial markets.
The Fed, in a short statement, said it will provide "reserves as necessary" to help the markets safely make their way. The central bank did not provide details but said it would do all it can to "facilitate the orderly functioning of financial markets."
This may prevent a big and nasty drop in the markets today. We'll have to wait and see.
Here's the Fed statement:
The Federal Reserve is providing liquidity to facilitate the orderly functioning of financial markets.
The Federal Reserve will provide reserves as necessary through open market operations to promote trading in the federal funds market at rates close to the Federal Open Market Committee's target rate of 5-1/4 percent. In current circumstances, depository institutions may experience unusual funding needs because of dislocations in money and credit markets. As always, the discount window is available as a source of funding.
10 comments:
Forgive my ignorance, but...
What, exactly, does this mean? Just saw this on CNBC, and popped over to see some analysis here. I understand this to be pumping money into the system? Is this large enough to affect inflation? is this a bailout, or merely stabilizing? Does the money go back to the reserve at some point? I guess I'm concerned about inflation/devaluation versus foreign currencies.
Thanks much- I really appreciate your blog!
This is a stabilizer. It's not enough to stoke inflation fears.
I was wondering to myself as I read through all the credit crunch news about something you've mentioned a few times. You said, many times, that US corporations, by and large, have a lot of spare cash on their balance sheets. I'm wondering how that plays into all of this.
I would guess that this means there is somewhat of a firewall to how bad this credit crunch gets. What we see now is that there's not a lot of buyers for debt right now because everybody's uneasy about ending up with the hot potato of sub-prime loans. But even if that means there's just a broad lock down on borrowing, presumably the broader economy can keep moving because they don't need to leverage themselves to do it.
Thoughts?
What raises my level of paranoia is this, from the Fed website: "The FOMC sets monetary policy by specifying the short-term objective for open market operations--purchases and sales of U.S. government and federal agency securities." Most sources only mention T-bills.
As I understand it, a lot of doubtful mortgages were held through agencies. So, this injection of liquidity could represent socializing risk by swapping dubious paper for cash with the expectation that the Fed would write it off.
I am also concerned because the European end of the bailout is much larger than reported losses would seem to require. Reuters did a comprehensive rundown, and it looked to me as if the European bailout was ca. 10 times larger than total losses. In the US, I don't know of any comprehensive rundown of losses, suggesting that most of the losses are here (and/or perhaps Asia).
The lack of transparency is what is causing the trouble. When Europe is more transparent than the US, there's a problem.
Charles of MercuryRising
www.phoenixwoman.wordpress.com
So the economic disincentive for engaging in patently risky behavior is...care to answer that? People bet big and the market bottomed out. And they get bailed out.
This is not a good sign. Isn't this the equivalent of every single American man, woman, and child being forced to cough up $100 dollars each to give to a bunch of idiots who paid too much money to buy no-doc, no down payment mortgages given to people with really bad credit to pay for houses that are way overpriced?
How is this a good sign? Especially since these markets are not FDIC regulated? (if I understand correctly, these securities are bundled and traded by groups that are not FDIC backed)
Like I said, not a good sign...
Apologies for the off-topic comment, Bonddad, but I couldn't find other contact information on here.
You're one of several names that George Phillies threw out as potential beta users of a new site that we're working together on:
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Of course anyone else reading this is also welcome to sign up and post a diary. The whole idea is, it's a meritocracy.
Thanks, and sorry for the semi-spam.
Regards,
Philip
They did $35 Billion repo actions in MBS paper which is a very expensive form of a Charmin roll at this point. How this calms nervous investors in Hedgies is beyond me. I want my money now, and I can ask questions later. Good luck on getting your money with the Hedgies not allowing redemptions. We all now know that regardless of what happens today, it will get far uglier for the world.
Make that $38B; the fed injected another $3B this afternoon. All of this after the $16B and $19B earlier today.
Gotta get those numbers up. We don't want anyone feeling too skittish over the weekend. Puh-leeze...
We'll see what happens on Monday when these repos end and the fed gives back all these MBSs...
libertarians (n.) - 1. a group of people, having read too much Ayn Rand, that decided they didn't want to be republicans because it felt dirty...and they wanted to smoke weed and get laid. 2. upper middle class (read "white") folk who've never held a real job
sorry couldn't resist the semi-spammer....all in good fun of course
the thedailyliberty.com sounds like an absolute intellectual oasis
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