From the U.K. "fed is in major panic mode"

[Dave Wood]

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/03/12/cnfed112.xml

[acptulsa]

"The market was starting to question the solvency of bodies that stand at the top of the credit pile." Was?

[ARealConservative]

This sums it up nicely

http://www.truthout.org/imgs.art_02/3.031308BC1_sm.jpg

[pinkmandy]

It is a ground-breaking move for the Fed to accept mortgage collateral, even if the debt is theoretically 'AAA-grade' debt. The Fed is constrained by Article 13 of the Federal Reserve Act from buying mortgage bonds outright, but it can achieve a similar effect by letting banks roll over collateral indefinitely. The European Central Bank is already doing this, shielding Dutch, Spanish, German, and some British banks from the full impact of the credit crunch.

The Fed is to create a new facility that allows banks to swap their mortgage bonds for US Treasuries. It is a well-targeted "sterilized" move to avoid adding fuel to inflationary fire. It follows the Fed's separate pledge last Friday to add up to $200bn in liquidity.



Can an economist please explain exactly what this means, how it is being paid for, etc.?

[acptulsa]

They're pumping billions of freshly printed dollars out and trying to find a way to prop financial institutions up by taking on loans (technically illegal) and giving the banks treasury (or savings) bonds in exchange.

[pinkmandy]

They're pumping billions of freshly printed dollars out and trying to find a way to prop financial institutions up by taking on loans (technically illegal) and giving the banks treasury (or savings) bonds in exchange.


That's what I thought. :mad: So they're basically giving the banks bonds and replacing them with loaned money that adds to the debt? And the banks can cash in the bonds for money?

I know they just print the money, but "on paper" who is loaning the money to the fed to do this or do they not say and just print it?

[acptulsa]

That's what I thought. :mad: So they're basically giving the banks bonds and replacing them with loaned money that adds to the debt? And the banks can cash in the bonds for money?

I know they just print the money, but "on paper" who is loaning the money to the fed to do this or do they not say and just print it?

Yes, the banks can cash the bonds for money, though they take a decrease in value if they do it early. And they just print it--and that's where inflation comes from. If there are excess dollars out there, they're easier to get and each one is worth less than before. So liquidity is increased, meaning there's more money, but there is also the problem of inflation.

And that just adds fuel to the fire. Beautiful, isn't it?

[pinkmandy]

Ah, I read taking on loans as taking out loans. Please pardon my confusion on the loan bit. ;) I couldn't figure out how the taking out loans fit into the printing money equation. No loans, just money printing. Business as usual.