September 29, 2008
What Will the Fed Do If There Isn't a Bailout?
Posted by David Zaring

Well, let's look at what else it did today:

  • Increase the number of Term Availability Facilities ("By committing to provide a very large quantity of term funding, the Federal Reserve actions should reassure financial market participants that financing will be available against good collateral, lessening concerns about funding and rollover risk.");
  • expand the size of foreign exchange swap lines ("The increase in the amount of foreign exchange swap authorization limits will enable many central banks to increase the amount of dollar funding that they can provide in their home markets.  This should help to improve the distribution of dollar liquidity around the globe.");
  • support the acquisition of Wachovia's consumer banking services by Citi ("In support of this transition, the Federal Reserve Bank of Richmond stands ready to provide liquidity as needed.").

These efforts come with big dollar values attached ("the total size of outstanding swap lines is $620 billion") ... but liquidity alone will not, apparently, be enough.  The crisis is internationalizing, though, and it is worth noting the Fed has rallied the foreign central banks to pump money into the system - and perhaps they did so as a hedge against Congress deciding not to legislate.

It's worth looking at what the Fed is doing, not least because it would be nice to figure out whether the Fed's discount window powers would be sufficient to bail out the financiers without legislation.  Based on the way that window has been used so far, the answer to that question is yes (or at least the Fed thinks it is yes - I'm not so sure).  The problem, I assumed, was that the Fed didn't have enough money to do to everyone what it did to AIG and Bear.

Anyway, Felix Salmon is thinking along similar lines:

the obvious next step is for the government to do something on its own -- something which doesn't require legislative approval. My best guess is that Treasury and the Fed are now going to try to come up with some kind of debt-for-equity swap: a recapitalization proposal which can be implemented through the Fed's existing powers.

UPDATE: What am I, psychic?

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Comments (4)

1. Posted by fedgovernor on September 29, 2008 @ 16:39 | Permalink

The Fed is a bank. It can lend money to whomever it wants, whenever it wants, at whatever rates of interest it deems.

The Fed can order the mint to print as many dollars at it requires.

And so what the Fed probably ought to be doing is regulating its member banks' behaviors. Allowing its banks to purchase securities is a mistake. It costs its members profits and is stupid business.

I fear this lesson is lost on Ben Bernanke, however, and as for Secretary Paulson ... well, what can one say.

Secretary Paulson led us to this debacle. And today's vote in the NYSE was a vote of no-confidence in the brand of leadership that led to today's stunning defeat of Paulson's plan.

2. Posted by Jake on September 29, 2008 @ 21:39 | Permalink

Government sponsored and funded debt-for-equity swaps? The People's Republic of China beat us to that policy innovation by about 10 years. Which is not to suggest it is a good idea.

And whose stock is fedgovernor shorting, anyway?

3. Posted by fedgovernor on September 29, 2008 @ 22:18 | Permalink

I'm long on America, but short on Republicans.

4. Posted by Bernie on October 1, 2008 @ 10:01 | Permalink

If this is truly a credit crunch affecting Main Street business then:
For every financial institution regulated by the Federal Reserve that meets the current capital adequacy standards for its investment risk - lower its reserve requirements by half.
This does not save bad banks, it does not reward risky behavior. Banks that have adequate capital will be able to double the lending that their existing reserves will support. If the reserve requirement reduction is set for 5 years or until the bank fails to meet the capital adequacy standards based on risk the bank will avail themselves of the opportunity to make more money but will continue to do so prudently.
Voila! no more credit crunch.

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