Fed to Lend $200 Billion, Take on Mortgage Securities

David Octavius · 03-11-2008, 01:19 PM

The Federal Reserve, struggling to contain a crisis of confidence in credit markets, will for the first time lend Treasuries in exchange for debt that includes mortgage-backed securities.

The Fed said in a statement in Washington it plans to make up to $200 billion available through weekly auctions, and officials told reporters the program may be increased as needed. The Fed coordinated the effort with central banks in Europe and Canada, which plan to inject up to $45 billion into their banking systems.

The Article continues on...

Good idea, bad idea? I have no idea

So you tell me!

WickedLou9 · 03-11-2008, 02:45 PM

Hmm. I think it will help with the specific problem that we are having, the credit crunch... but I am hesitant to say that it's a good idea. Something about this just doesn't seem like a good idea to me but I'm not sure why. Obviously this will not be the first industry that the federal government has bailed out and probably will not be the last either.

hsmith · 03-11-2008, 03:02 PM

It is a HORRIBLE idea. We are bailing out those businesses and individuals who made POOR decisions. They should suffer for their missteps and suffer severely. Yes, it will have a negative impact on our economy, but so will bailing those people out - we can't afford to.

Now, what really makes it horrible is those who made the correct choices - not borrowing more than they could afford and those that were waiting till the market corrected to buy.

By doing this, we 1) punish responsible people 2) reward irresponsible people 3) keep prices of houses high.

If we do this, we won't see the necessary correction in housing prices that needs to happen. Corrections flush out bad investment and make the house affordable again to people who waiting. All this will do is keep housing prices high and keep people who are responsible out of them.

Fed Up · 03-11-2008, 03:20 PM

I wrote to the Fed to get an idea of what effect this might have on M3 as I don't want them loaning money that would hurt the dollar. It has no effect on M3. It's merely a matter of "switching collateral for collateral." Therefore gold didn't take off and fell a little bit as the dollar gained a little bit. This is one ugly chart for the dollar: US Dollar Index (give time for java to load)

Here's the Fed's Press Release of their plans with a FAQ associated with it:

http://www.newyorkfed.org/newsevents/news/markets/2008/rp080311.html

IMO, anything the Fed does is a "temporary" fix and will come back to haunt them down the road. At some point their temporary fixes won't work and that will be when TSHTF.

And yes hsmith...it's all about bailing out the banksters for them. They have to keep the game going right? Interestingly enough their purpose used to be to maintain the value of the dollar. They're failing miserably at that as now they have their hands in everything. This won't end well.

Fed Up

JaJae · 03-11-2008, 03:33 PM

Originally Posted by hsmith

By doing this, we 1) punish responsible people 2) reward irresponsible people 3) keep prices of houses high.

This is a very good point. I'd hate to see so many people lose their homes, but when people make bad investments on Wall Street does the government bail them out? I dunno if this is the right solution, but something needs to be done to protect as many people from losing their homes as possible. Perhaps allowing these people to refinance at a slightly higher fixed rate than the average "responsible" people have to pay.

hsmith · 03-11-2008, 03:43 PM

Originally Posted by JaJae

This is a very good point. I'd hate to see so many people lose their homes, but when people make bad investments on Wall Street does the government bail them out? I dunno if this is the right solution, but something needs to be done to protect as many people from losing their homes as possible. Perhaps allowing these people to refinance at a slightly higher fixed rate than the average "responsible" people have to pay.

If someone can refinance I don't have an issue with it. The gov't stepping in and forcing the banks to have them refinance at a specific rate, that is poppycock. If you can get a good rate because of your credit, bit off more than you can chew and can't afford payments, that isn't my problem - you deserve to lose your house.

It isn't fair, but either is forcing me to pay for it when I have abstained from buying till I can afford it.

Fed Up · 03-11-2008, 03:46 PM

I wanted more clarification on the bailout of the banksters issue, so I wrote the Fed again...

My question;

Is this move a bailout of the banks who made bad loan decisions? A way for them to get back on their feet per se?

The Fed's answer;

Absolutely not, read answer to question one in the FAQ.

Here is what FAQ question one said;

What is the TSLF?
The TSLF is a 28-day facility that will offer Treasury general collateral (“GC”) to the Federal Reserve Bank of New York’s (“FRBNY”) primary dealers in exchange for other program-eligible collateral. It is intended to promote liquidity in the financing markets for Treasury and other collateral and thus to foster the functioning of financial markets more generally.

So what I got out of this exchange is no effect on the money supply and they are not bailing out the banksters.

I'm going to wait for Mish Shedlock's take on it and I'll post it here if he makes any comments. That or Peter Schiff's take on it.

Fed Up

WickedLou9 · 03-11-2008, 03:58 PM

That's kinda BS. It is bailing out the banks in a way. They have all of these mortgage backed securities that they pretty much can't sell. If you can't sell something it's worthless. If I understand this right, they are going to offer to exchange Treasury securities for these MBS ( mortgage backed securities). Is that the gist of it or am I totally confused?
If that's accurate they are essentially giving money away. US treasury securities are considered the safest investments in the world. They are as good as cash. They are exchanging these "cash like" items for other items which have no cash value in the market right now.
But maybe I didn't understand this right.

Fed Up · 03-11-2008, 04:03 PM

Here's Mish's take on it...

Mish's Global Economic Trend Analysis: Central Bankers "Pull Out All The Stops"

His comment: "My only comment is to say this new program will have as much success as the others, which is to say little to none. This is not a liquidity problem but a solvency problem. For all practical purposes the game is up but the Fed does not know it yet."

Fed Up