The larger point is that ANY assets banks are allowed to hold already have to be on the regulators approved list, and banks in any case can fund all their (legal) assets with with govt insured deposits.

So why should another arm of government, the Fed, not always provide funding for the same govt approved assets that the govt already provides funding for? Why did it take them so long to come up with the TAF and now with the security lending facility?

And even now only with partial measures?

Clearly they are still in the dark on the workings of monetary ops and reserve accounting?

You may recall my proposal back in August (long before that, actually):

Drop the discount rate to the FF rate and open it up to any bank legal assets.

This should have always been the case.

The Fed’s ‘job’ is to administer interest rates, and that’s how you do it.

It’s about price, not quantity. Fed operations don’t materially change any of the monetary aggregates, as many who should have known all along have been ‘discovering.’

Yes, in good times the system did function reasonably well, but the risk was always there that in a crisis it would break down.

My other proposals remains equally valid:

Let government agencies fund via the Fed Financing Bank (at Treasury rates). They exist for public purpose, shareholders remain at risk for default losses, and lower interest rates would get passed through to the housing markets.

The Treasury should open it’s lending facility and lend Treasury securities in unlimited size to primary dealers.

Lastly, this is a good time to get the Treasury out of the capital markets and limit them to the issuance of 3 month bills. This would lower long-term rates, which is the investment part of the curve.

3 Responses

  1. Now, the Fed appears unable to put the finishing touches on this new program so there is a fresh round of uncertainty.

  2. They got the exact reaction they had hoped for with MBS tightening upwards of 75bps, then they go and mess around with minutia…very bizarre.

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