Posted on 03/10/2008 6:15:48 PM PDT by 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
(Excerpt) Read more at online.wsj.com ...
I guess the bank just makes a ledger entry and it is all ok.
I'd ask you to walk us thru the steps, but you've already run away every time I ask. It's like you're making it up as you go.
The banking system as a whole picked up the multiplier. It is an error to state that any one bank multiplies the money. I know what a margin call is and as you explain below, the T-Bills that the investment bank borrowed can meet the margin calls. Now the Fed has gone further, Bear Stearns has an undisclosed credit line of T-Bills from the Fed through JPM for more than just margin calls. Will they pay those all back? Sure. Maybe. Maybe not. It is certainly possible they will default on some of it.
It does (2T or more), but in the banking system as a whole, not in one bank. The 10% reserve requirement is lowered in special cases (which I would think there are more of at the moment).
Excellent! You might want to explain that to a couple of the other people on this thread.
I know what a margin call is
Then why are you talking about banks meeting margin calls?
and as you explain below, the T-Bills that the investment bank borrowed can meet the margin calls.
Bear Stearns is getting a margin call from (for instance) JPM. JPM (or any other bank) is not getting a margin call from the Fed.
Now the Fed has gone further, Bear Stearns has an undisclosed credit line of T-Bills from the Fed through JPM for more than just margin calls. Will they pay those all back?
You mean will they return them. If they don't, the Fed has their collateral. The proper question is, should they fail to return the Treasury securities, will the collateral they deposited have enough value to cover the value of the Treasury securities.
It is certainly possible they will default on some of it.
You bet.
It does (2T or more), but in the banking system as a whole, not in one bank.
No, it doesn't. If the Fed bought $200 billion in T-Bills, the new cash added to the system would end up adding $2 trillion (use a different multiplier if you want to) to the money supply.
The debt swap doesn't have the same impact as new cash.
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