I’m writing the Fed chapter of my econ textbook right now, and I’m fascinated to see that the “term auction facility” has been added as a fourth tool of monetary policy on the Fed site (see here).Should I add the “TAF” to the textbook chapter, or will it be gone by the time that the textbook comes out?
On a slightly different topic, some think the TAF is a bailout for the banks. Steve R. Waldman thinks so. He writes:
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.
I agree with several commentators (Felix Salmon, Calculated Risk) that the Bair/Paulson Plan, whatever it is, is not a bailout. But this, this is a bailout,. Nearly all government bailouts take the form of subsidized loans, extending credit at low rates to counterparties or against collateral for which the market would have demanded a high premium. That is precisely what the TAF will do. 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. The Fed hints at this when it mentions the “wide variety of collateral” that can be used to secure loans. You can bet that whatever it is private lenders are eschewing will be pledged as collateral to the Fed under TAF. The Fed is going to bear private risk that the market refuses to. That is a bailout.
Felix Salmon agrees also:
The Fed won't just lend out $40 billion in an attempt to inject some liquidity into the banking system, oh no. It requires collateral. But, as jck says in the comments to my earlier blog entry, it seems as though "any junk will do" in terms of the collateral the Fed will accept.
Now it's worth noting that the Fed is going to be repaid on its loans no matter what happens to the collateral. We're not talking non-recourse loans here: there's really no chance that one of the Fed's borrowing banks is going to suddenly go bankrupt and leave the Fed holding some paper of dubious value. But it certainly seems that any bank sitting on a bunch of nuclear waste and suffering from liquidity problems has now found its savior in the Federal Reserve