Mendacious Wacko of the Right Named Undersecretary Designate
The Best Intro Econ Teacher I Know, Timothy Taylor Writes in...

Is TAF Really that Big a Deal?

Steve Randy Waldmann on the Federal Reserve's TAF:

Interfluidity :: TAF is a really, really big deal: [W]hen I woke up the the Federal Reserve's press release about the TAF, my jaw dropped. It was one of those moments when the world shook.... If you think (as I believe most Fed policymakers do) that the goal of monetary policy in reacting to the current financial crisis is to make it go away, this plan is brilliant.

Under traditional discount window borrowing, the best the Fed could do is offer funds at a "penalty" or "premium" and hope that banks borrow, despite a longstanding market perception that direct borrowing from the Fed is a sign of weakness. Now, the Fed has turned the tables.... The scale of this program is immense.... "No more pussyfooting around. You will borrow, and not $1 or $2 billion, but $40B, now!"... The Fed's press release claims, of course, that loans will only be available to "sound" banks, and that they will be "fully collateralized". But no one who can get the same deal from private markets will use this facility. The need for the program arises because private markets are skeptical about the soundness of counterparties and the quality of the assets they have to offer as collateral....

To lend 40B cash fast, the Fed may well have to offer the money at near the Federal Funds rate, because the particpation of very creditworthy banks will be required to get rid of the dough. But less creditworthy banks will be participating as well, and, in a single-price auction, these banks will enjoy the low interest rates effectively set by large-bank bidding. So, it is likely that the TAF rate will be very close to the expected Federal Funds rate, but that noncreditworthy borrowers pledging iffy collateral will gain the capacity to borrow at that rate. The effective discount window "penalty" will drop to about zero, even though the formal discount premium will stay at 50 bps...

Comments