Will Fed Try Something New to Aid Markets?

Wall Street Journal ^ | 10 March 2008 | DAVID WESSEL

[shrinkermd]

With worsening strains in credit markets threatening to deepen and prolong an incipient recession, analysts are speculating that the Federal Reserve may be forced to consider more innovative responses -- perhaps buying mortgage-backed securities directly.

"As credit stresses intensify, the possibility of unconventional policy options by the Fed has gained considerable interest

...Since 1932, the Fed has had the authority to lend, against collateral, to individuals, partnerships or corporations other than banks in "unusual and exigent circumstances," subject to the vote of five members of the Board of Governors. (The board has seven seats, but two are currently vacant.) This power has never been used.

Mr. Feroli noted that Congress in 1966 gave the Fed temporary authority, made permanent in 1979, to purchase obligations of government-sponsored enterprises, such as Fannie Mae and Freddie Mac.

So far, the Fed hasn't purchased GSE obligations except in its short-term repurchase operations. When the federal budget was in surplus, the Fed considered outright purchases of GSE obligations, but judged against such a move as it would reinforce the perception of an implicit government guarantee.

Last week, the Fed said it would lend banks $100 billion starting this week in 28-day loans through its new Term Auction Facility, at which banks can post a wide variety of collateral, including mortgages, corporate loans and other items that have become harder to sell in the open market. And it said it would make money-market loans of as much as $100 billion to its network of 20 bond dealers for 28 days, double the usual maximum term, and structure them to encourage dealers to submit mortgage-backed securities guaranteed by Fannie and Freddie Mac.

Sen. Christopher Dodd (D., Conn.), chairman of the Senate Banking Committee, has suggested creating a new government corporation that could buy mortgage-backed securities

[shrinkermd]

My optimism is disappearing almost as fast the values of my stocks. This fear and uncertainty action does not help.

[The_Republican]

Here is something new that Feds could try - Let Free Market take its course.

[the invisib1e hand]

I say the spitzer thing is good for a coupla hundred point rally.

[the invisib1e hand]

Sen. Christopher Dodd (D., Conn.), chairman of the Senate Banking Committee, has suggested creating a new government corporation that could buy mortgage-backed securities

Nobody saw this coming.

The reason history repeats itself is because leftists never learn.

[Moonman62]

Here is something new that Feds could try - Let Free Market take its course.

What free market? Do you think raising interest rates to slow the economy and then getting a slow economy is a free market?

[Nervous Tick]

The Fed buying dodgy instruments with shaky collateral, just to bail out speculators/markets/financial institutions, is just plain WRONG.

[Moonman62]

The stock prices of Fannie and Freddie have been dropping like rocks.

[BGHater]

Oh joy, more Fed work. Looks like they are playing Dr. House at this point.

[Moonman62]

I don’t think the Fed will do it unless they see it as saving the entire economy.

[M203M4]

I really hate to be a pessimist, but we are screwed. Not because of this present market kerfuffle, but because of the government intervention strategies being openly advocated by the mainstream of both major political parties, the media, and even some economists (or rather, talking heads who play economist on TV - so I twice count the media). It keeps getting worse, with ever more pervasive interventionism marching into place over the last century - not ever really fixing anything, just simply patching over the damage wrought by their own doing from the time before, each time introducing new structural weaknesses in return for short-term mending of the facade.

Democracy, in particular the desire of politicians to postpone painful but necessary market corrections until their tenure is over, is destroying capitalism. Because of the resistance to the notion that the existence of both winners and losers is necessary and moral (and the associated ravaging wrought by losers at the ballot box upon incumbents and carriers of their legacy), our political masters will ensure that we are all losers.

[JasonC]

They could stand on their heads and feed democratic congressmen wall street executives to eat, raw, like performing seals. Oh wait, they've tried that already...

[JasonC]

Um, isn't that kind of redundnant, and what else would they buy? What else is there?

[JasonC]

Yep. The treasury secretary said last week that no, they weren't considering extending an explicit federal guarantee to their debt. What'd he expect, a doggie biscuit?

[JasonC]

They had to raise them and were darn slow about it. That wasn't the error. The bubble was formed earlier, with plenty of blame to go around as to its cause, including plenty in the free markets - builders, lenders, buyers, all of them. And yes also rates set too low too long after the 2001 crash.

[Moonman62]

I could see them raising them to the 3 area, but 5.25 was too high. The economy doesn’t cause inflation and didn’t need to be slowed.

[Travis McGee]

"There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved."

~~Ludwig von Mises

[liberallarry]

The Fed is lending money to banks with more or less automatic roll-over. Inotherwords they're giving them money at very low cost. And now the Fed is considering buying all the banks' bad debt (at inflated prices no doubt). These are the same banks which lobbied to defeat the Foreclosure Prevention Act (with the Republicans acting as their whores).

Not much of a choice this year. Either we're going to get the usual Republican crooks...or new Democratic incompetents.

[JasonC]

The housing market was out of control and gold had already doubled. They should have tightened a year or two sooner, and there was nothing whatever wrong with the top rate reached. Frankly, we got off very easy in that respect - it might easily have taken 8% or more to break real estate speculation. As it is, the level was low and the stay brief. Nobody who paid or lent on the nosebleed prices for housing can blame anybody but themselves. They were transparently insane for two years running.

[peeps36]

Government is destroying our economy. They are manipulating the markets for short term political reasons and throwing the future into financial turmoil. America is in debt up to its eyeballs but it thinks it can borrow and spend its way to prosperity. This crazy idea is driven by politics and the politicians who will sacrifice us all to stay in power. The government will have to print new money to keep up with its ridiculous spending habits but there's no way a weakening dollar can handle that. It's going to get real ugly before this is over with but hopefully the system comes out of it cleansed of its poison.

[mysterio]

I’ve got an idea for government : stop borrowing.