Is the Fed trying to prop up foreign banks holding sub prime garbage?

nevadan · Jan 20, 2008

This chart from the St. Louis Fed got my attention. One thing led to another and makes me ask the question for this thread.
US Monetary base collapse chart from the St Louis FED
http://research.stlouisfed.org/fred...e&width=1000&height=600&preserve_ratio=true&s[1][id]=NFORBRES
(sorry, you'll have to type in the NFORBRES in the series look up box, I couldn't get the whole link to take.)

It appears that the Term Auction Facility is a new "tool" that the Fed is using to inject liquidity. I went to Wikipedia to find out what the TAF is and the definition describes what appears to be a dodge by the Fed to lend to institutions outside its' purview.

On December 11th, 2007, the Fed lowered its discount rate to 4.75%, but due to the lack of borrowing from the discount window in the previous weeks, and a lack of velocity after the 2007 credit crunch, the Federal Reserve and several other central banks opened their short term lending windows, hoping to alleviate the strain on interbank lending markets. in the Federal Funds market the Fed, along with the Bank of Canada, Bank of England, the ECB and the Swiss National Bank, decided to implement a new monetary instrument the following day. This program, known in the US as the Term Auction Facility, enables the Fed to auction a set amount of funds to depository institutions, against a wide range of collateral. Auctions held on December 17th and December 20th released $20 billion each in the form of 28- and 35-day loans, respectively.[4] On the December 17th Auction, bids began at 4.17% and ended with a rate of 4.65%, substantially below the discount rate. The Fed received over $63 billion in bids and released the full $20 billion to 93 different institutions.[5]

As part of an effort to increase dollar liquidity around the world, the Fed coordinated with other central banks to lend simultaneously to depository institutions outside of its jurisdiction, which it cannot lend to directly. On December 11th, the ECB held a simultaneous auction, in dollars, and awarded $10 billion at the rate determined by the Fed's auction.[6] To facilitate the provision of U.S.-dollar liquidity by these other central banks, the Fed arranged currency swap lines with the ECB and the SNB in amounts of $20 billion and $4 billion, respectively.

The Fed is using the TAF as a trial of this type of monetary tool. Depending on its success and usefulness, the Fed may begin to use it as part of a more permanent program.
More...

Note the phrase "the Fed coordinated with other central banks to lend simultaneously to depository institutions outside of its jurisdiction, which it cannot lend to directly.". Am I reading this right? Our depository institutions have negative reserves and the Fed is going to throw gobs of money worldwide to to keep credit available?

Comments?

Wallace · Jan 20, 2008

quite a drop on the chart eh

yes:
US Federal Reserve Offering Emergency Funding to British Banks Oct 21/07
http://cryptogon.com/?p=1486

http://michael-in-norfolk.blogspot.com/2007/12/barclays-sues-bear-syerns-over-sub.html

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Is the Fed trying to prop up foreign banks holding sub prime garbage?

nevadan

Wallace