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Now we are getting serious

Posted by: Michael Mandel on March 11

The Federal Reserve announced today an expansion of its securities lending program. Under this new Term Securities Lending Facility (TSLF), the Federal Reserve will lend up to $200 billion of Treasury securities to primary dealers secured for a term of 28 days (rather than overnight, as in the existing program) by a pledge of other securities, including federal agency debt, federal agency residential-mortgage-backed securities (MBS), and non-agency AAA/Aaa-rated private-label residential MBS.

Wheeling out the heavy artillery now. They may need to ramp up one more time.

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Reader Comments


March 11, 2008 09:49 AM

I fail to see how this improves liquidity. In a FAQ on the Fed announcement it says:

Do these operations have a reserve impact?
No, the securities loans will not affect overnight bank reserves since the loans are collateralized with other securities.

Seems to me that they will perhaps improve the quality and liquidity of dealer inventories, but not adding any reserves to the system.

Mike Mandel

March 11, 2008 12:21 PM

No reserves..but that's a feature, not a bug. It means that the Fed can do as much of this as it wants without affecting reserves.


March 12, 2008 10:55 AM

I realize that since Greenspan declared it so, it's been uncool to look at any sort of monetary quantities; but Y/Y growth in the monetary base that is below the growth rate of the real economy and negative Y/Y growth in M1 is not the way to cure a credit crisis.

The assumption that the existence of what has been referred to as "a shadow banking system" eliminates dependence on the real banking system is clearly untrue. As credit markets such as commercial paper have frozen up it has been left to the real banking system to pick up the slack, but somehow all the "modern monetarists" seem to think this can be done without growth in aggregate reserves. Open market operations have been replaced by open-mouth operations.

"Quantitative easing" has been labeled the last bullet -- a last desperate resort. Guess what! Prior to Greenspan, whose version of monetary policy resembled a drunk weaving down the road bouncing from ditch to ditch, monetary policy was generally quantitative in nature. Paul Volker crushed inflation with quantitative tightening -- not open mouth operations.

In mathematics it is often useful to look at endpoints to assess the correctness of a relationship, so let's look at an endpoint. If reserves don't matter and less is better, let's remove all reserves from the banking system. That will eliminate any chance of inflation rearing its ugly head. Oops, that gets kind of close to what the Fed did at the beginning of the Depression.

Hmmm, must be a bug somewhere!

Mike Mandel

March 12, 2008 11:18 AM

Yes, they are trying to avoid growth in aggregate reserves, at least for now, because they are worried about inflation.


March 12, 2008 03:25 PM

I know that is what they are thinking. I am convinced they are wrong! Growth in the monetary base that is less than real economic growth (which is what we have had) is deflationary (which is what we are going to get).

Yes, M2 growth has been accelerating, but M2 includes CDs. The quantity of CDs is more reflective of demand for bank loans than Fed policy. When banks face high loan demand (because the Commercial Paper market isn't working?) they peddle CD's to fund loans and M2 grows. This is not the same as growth in Reserves, though. Reserves are a portion of bank assets; CD's are liabilities. It takes both for banks to operate.

Thank you for your interest. This blog is no longer active.



Michael Mandel, BW's award-winning chief economist, provides his unique perspective on the hot economic issues of the day. From globalization to the future of work to the ups and downs of the financial markets, Mandel-named 2006 economic journalist of the year by the World Leadership Forum-offers cutting edge analysis and commentary.

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