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Fed's New Plan Amounts to a Bailout

by Travis Pantin
Thu, 13 Dec 2007 at 7:49 PM

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"The Blair/Paulson Plan, whatever it is, is not a bailout. But this, this is a bailout," economics blogger Steve Waldman writes about the Fed's announcement yesterday that it will establish a Term Auction Facility designed to help banks by alleviating credit shortages.

The "TAF is a really, really big deal," he writes.

When Mr. Waldman first read the Federal Reserve's press release yesterday morning, he writes, his jaw dropped: "It was one of those moments when the world shook, everything was the same, but everything had changed. So, when I step into the blogosphere to read comments like 'solid first step,' I feel compelled to spew some first impressions."

Among his impressions: "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."

In the past, the best the Fed could do was offer funds at a "penalty" and hope that banks would borrow, "despite a longstanding market perception that direct borrowing from the Fed is a sign of weakness. Now the Fed has turned the tables," Mr. Waldman writes.

"Typically direct borrowings from the Fed are under $1B," he writes. "It was a big deal in August when in a clearly orchestrated and coordinated move, 4 big banks were persuaded to temporarily borrow $2B total, in an attempt to diminish the 'stigma.' This is the Federal Reserve saying, 'No more pussyfooting around. You will borrow, and not $1 or $2 billion, but $40B, now!'"

The Fed is essentially agreeing to help banks by extending them credit at low rates against lousy collateral. Felix Salmon of Market Movers reports that the Fed will even accept subprime credit-card receivables.

"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," Mr. Salmon writes.

"The Fed is going to bear private risk that market refuses to," Mr. Waldman adds. "That is a bailout."

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