The Fed responds
The WSJ describes the excellent Fed strategy to buoy up the mortgage securities market, which market we discussed in very unhappy terms just the other day, as a follow up to a piece on the Fed’s performance appearing to be deficient on these serious issues:
The Fed said it would create a new program to supplement its low-profile securities lending program to enable bond dealers to borrow up to $200 billion of much-sought Treasurys, and pledge a range of mortgage backed securities (MBS) as collateral. It will make the Treasurys available for up to 28 days at a time rather than overnight, as is the case in the existing program.
By providing an outlet for those MBS, the program is meant to make dealers more comfortable buying and holding such securities which are now being dumped by investors facing margin calls and others nervous about the strength of Fannie Mae and Freddie Mac, the huge, privately-owned government-sponsored mortgage agencies that guarantee most MBS.
One question is this: is $200 billion enough? The Fed has about $709 billion of Treasury securities on its balance sheet, so it would appear to have some room to expand the program beyond its currently announced size. But that is a question for another day.
For today, it was perhaps enough that the Dow advanced 416.66 points, the most in over five years. Maybe we’ll consider additional negative pieces on the government’s financial management if their timing continues to coincide with market bottoms and rallies of this nature.
March 12th, 2008 at 1:28 am
Maybe we’ll consider additional negative pieces on the government’s financial management if their timing continues to coincide with market bottoms and rallies of this nature.
Heh. I’ve been commenting for some time that insider buying of US stocks became very strong as the market sank due to the housing situation. The continuing enthusiasm reported in my latest tracking letter seemed surreal given Monday’s markets: surreal to the point that it seemed absurd to bring it up here yesterday evening.
March 12th, 2008 at 4:37 pm
OK, so the Feds are supporting the stock market and the demented mortgage-backed securities. (Now, granted the Fed is not officially the US government but it is to all intents and purposes acting as an arm of it.)
How is that any different from a fully-socialized society and government?
Tell you what, let’s set things up to eliminate the middlemen - Wall Street. Let’s just all make our mortgage apps directly to the IRS and repay them over time.
It would be much more transparent and cut out the middlemen.
March 13th, 2008 at 3:57 pm
The Fed is doing battle with “irrational exuberance”. Everyone is second guessing the Fed’s actions and ascribing to the belief that if the Fed acted sooner, all would be better. Is that really the case?
The “book” on Fed action was built into the market. “Irrational exuberance” could flail away at the market knowing that any Fed action would be telegraphed by prior Fed actions. This would allow “irrational exuberance” to reach for new heights of stupidity as it was expected the Fed could/would always clean up after the party was over.
I feel the Fed is doing the right thing. People need to take responsibility for their decisions/actions.