Term Securities Lending Facility

If financial innovation got the financial system into trouble, then financial innovation should be able to pull it out of trouble. The latest Fed innovation.

The Federal Reserve announced today an expansion of its securities lending program. Under this new Term Securities Lending Facility (TSLF), the Federal Reserve will lend up to $200 billion of Treasury securities to primary dealers secured for a term of 28 days (rather than overnight, as in the existing program) by a pledge of other securities, including federal agency debt, federal agency residential-mortgage-backed securities (MBS), and non-agency AAA/Aaa-rated private-label residential MBS. The TSLF 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. As is the case with the current securities lending program, securities will be made available through an auction process. Auctions will be held on a weekly basis, beginning on March 27, 2008. The Federal Reserve will consult with primary dealers on technical design features of the TSLF.

In addition, the Federal Open Market Committee has authorized increases in its existing temporary reciprocal currency arrangements (swap lines) with the European Central Bank (ECB) and the Swiss National Bank (SNB). These arrangements will now provide dollars in amounts of up to $30 billion and $6 billion to the ECB and the SNB, respectively, representing increases of $10 billion and $2 billion. The FOMC extended the term of these swap lines through September 30, 2008.

Real Time Economics compiles some reactions of economists to the Fed move and sums them up as calling it the "'smartest' Fed move".

Markets apparently agree. From Bloomberg:

U.S. stocks rallied the most in five years on optimism the initiative will help avert a wider credit crunch. Treasuries fell and the premiums investors demand for debt backed by home loans guaranteed by Fannie Mae retreated from close to a 22-year high...

But fears from the underlying problem in the housing market remains.

"This will assist some of the big banks," said Walter Gerasimowicz, head of Meditron Asset Management, which manages $1 billion. "But it won't bring the light at the end of the tunnel. The housing-market problems will take at least all of this year to settle, and until that happens, the banks aren't going to be relieved fully."

Indeed, Calculated Risk notes comments from Paul Krugman and Steve Waldman and writes:

As Waldman notes, the Fed has used up a significant portion of their available resources already. So, this "slap in the face" better work. If we start talking about a 4th wave of the liquidity crisis, watch out!

But if what Willem Buiter says is true, maybe we should ask whether all this obsession with the problems in the financial sector is really appropriate in the first place.

The sky must surely be falling on the financial sector... What has not been reported is the...subprime-related gains...

Things are tough enough without us exaggerating the problems through egregious double, triple, quadruple & higher multiple counting. Economic prospects for the US are poor, but nowhere near as bad as the growing crescendo of the moans emitted by the losers in the inside asset revaluation game would have us believe.