Central Banks, in Panic Mode, Announce Large Auction

The U.S. dollar skyrocketed this morning after the Federal Reserve announced auctions to lend as much as $200 billion in U.S. Treasuries. This is a coordinated operation in conjunction with the European Central Bank, the Swiss National Bank and the Bank of England. According to the statement published on the website of all 4 central banks:

Since the co-ordinated actions taken in December, the G-10 central banks have continued to work together closely and to consult regularly on liquidity pressures in the funding markets...

We all continue to work together and will take appropriate steps to address these liquidity pressures.

The Fed has increased its swap lines with the ECB and SNB. The Bank of England also announced that it is extending its 3 month loan program. The Fed is now willing to accept a wider range of collateral including federal agency debt, federal agency residential-mortgage-backed securities [MBS], and non-agency AAA/Aaa-rated private-label residential MBS. These loans will be available for 28-days which make them more generous than the overnight loans offered under the current program.

Today’s announcement comes minutes after the trade balance report, indicating that the Fed is in panic mode. Their prior actions have only lasted for a few days at best, and with each announcement they are stepping up the ante. Unfortunately, as much as they try, banks are still reluctant to lend money, which will hinder their efforts.

Expect the dollar to continue to benefit from this announcement, but the rebound may not last because this action allows Bernanke to substitute a 50bp rate cut for a 75bp cut next week.

Stocks are up, today should be a good day - or at least the Fed hopes so.

Comments

[Wisdom-Seeker:]

All this does is postpone the inevitable. Allowing big banks to hide bad loans by taking them in temporarily as "collateral" doesn't actually solve anything. But it's nice to see that they're trying things other than simply lowering the Fed Funds Rate.

2008 Mar 11 09:54 AM

[Stewie:]

I completely agree, all these "creative" one off policy initiatives are designed to motivate banks to soften their credit standards. The problem is this same focus is what led to our current pathetic situation. This does nothing to address the real problem and only buys a little more time and political mileage.

2008 Mar 11 10:22 AM

[Lilguy:]

Either the Fed had to do this, or Congress would have had to rescue the housing agencies with new capital--because they are all but busted on their mortgage loan losses.

Obviously, it also helps others who are holding increasingly bad agency debt.

And, as you say, it's better than huge FFR cuts.

2008 Mar 11 10:26 AM

[Dragon Master:]

<<new capital>> USA was already bankrupt. Where the "new capital" comes from?

Fed just prints another 200b paper fill the holes by diluting its citizen wealth or around the world.

For a bankrupt gov, the only way to walk out this mess is to inflate numbers by printing more paper. When the house price valued by paper money (not intrinsic value) is being inflated enough not down, then Fed will stop. This is the whole story happening now.

2008 Mar 11 10:37 AM

[sammyg123:]

Oh my, does this move smell like desperation or what? Let's see, the Fed now accepts non-agency paper as collateral, and is stepping in as BUYER OF LAST RESORT for whatever happens to be out there. By using non-agency paper as collateral, they are arbitrarily setting a price on this stuff, which perhaps couldn't be priced before because of the credit freeze. So, financial institutions are going to start lending now? Well, they'll certainly borrow more for the Fed by putting up very questionable collateral, that is for sure. Meanwhile, the real price of this paper will be eventually realized, but who will be holding it - the bank or the US taxpayer-financed Federal Reserve? What will happen when one of these papers defaults while in the Fed's vaults? Who pays for it then? The stock market likes this move, especially because financials will be able to use the auction window to prevent further write downs - they have prices on their paper now that is established by the Fed! No need to write it down anymore! It has a price set by the auction window! A price set by the government - it's a price floor! Seems like we bottomed, for now.

2008 Mar 11 10:50 AM

[Paulo:]

The central banks pulled out the defibrillator. Let's see what happens next.

2008 Mar 11 11:29 AM

[DougM:]

"What will happen when one of these papers defaults while in the Fed's vaults? Who pays for it then?"

It's still owned by the bank that put it up as collateral. The fed only gets stuck with it if the bank goes under. The government's on the hook for that anyway via the FDIC.

"Meanwhile, the real price of this paper will be eventually realized"

That I think is the point - buy time to see what the paper is really worth. Since the "market" for this paper is so illiquid, it's hard to have much confidence in the prices being set. The ill-considered mark-to-market accounting rules effectively allow a handful of liquid low-ballers to force the entire banking system into insolvency.

2008 Mar 11 11:38 AM

[Dennis Lucey:]

"The Fed is now willing to accept a wider range of collateral including federal agency debt, federal agency residential-mortgage-b... securities [MBS], and non-agency AAA/Aaa-rated private-label residential MBS."

You mean, AAA, like Ambac and MBIA?

2008 Mar 11 12:03 PM

[Just Say Whoa!:]

Even George Bush has acknowledged "our economy has slowed".

Guess those tax cuts ain't working no more.

So, if GWB's tax cuts ain't working, do we need more?

Or can we raise taxes l(ike Clinton did) and rein in spending (like Clinton did) create a budget surplus and 6 years of prosperity?

2008 Mar 11 12:44 PM

[swiggs:]

Can someone explain to me why the dollar would skyrocket on this news? My logic: this means there wont be further rate cuts, with lower rates causing people to seek higher rates from other currencies

2008 Mar 11 12:52 PM

[Robster:]

hey swiggs i think you answered your own question. Less expectation of lower rates means money will flow to U.S. due to rates not being a slow as expected now. T-note yields are up attracting greater inflows.

2008 Mar 11 01:03 PM

[res ipsa lo...:]

This is stabilizing the dollar because the markets are thinking short term--trade today and let others worry about tomorrow. But eventually, people will start thinking longer term: about the long term inflation implications, that the Fed will do this more and more, whether the soon-to-hyper-inflate dollar is a good investment at current low interest rates, and the impact of hyper-stagflation on the American consumer.

2008 Mar 11 01:22 PM

[ganeshji:]

Help me with one thing...does anyone think this was a smart idea. One because if you help hold the dollar I think overseas investors may be more willing to put money into our market. It seems hard to me to make money if you are a overseas investor is losing money due to the dollar sinking.

I due think it was smart...I'm not sure if it will work since banks might still hold as much cash as they can.

Thanks,
Douglas

2008 Mar 11 02:40 PM

[helplessobs...:]

This is the first step to getting all these bad loans on the public's balance sheet. How else are the banker's going to get bonuses they think they deserve? We still have big, big troubles at FannyMae and other GSEs. Some FED officials predict inslovency as their losses baloon.

2008 Mar 11 08:53 PM

[helplessobs...:]

This is the first step to getting all these bad loans on the public's balance sheet. How else are the banker's going to get bonuses they think they deserve? We still have big, big troubles at FannyMae and other GSEs. Some FED officials predict inslovency as their losses baloon.

2008 Mar 11 08:53 PM

[sammyg123:]

special1person - raising taxes isn't the answer. Taking money out of the hands of consumers isn't the answer. Politics is not the solution to economic problems, unless it means cutting taxes. This isn't an economic theory, it's a reality. Obviously there are political operators posting on Seekingalpha, and they are democrats trying to condition our minds to voting for Hillary or Barak, or whatever. Let's keep politics out of seekingalpha, or this site is going to degrade even more. Silly liberals, finance is for capitalists.

2008 Mar 12 02:23 AM

[sammyg123:]

special1person, I do agree that spending must be cut, but nobody is talking about that, especially not the side that you advocate. Hillary isn't Bill, and Barak isn't JFK. Neither of those two is credible, whether considering the economy or national security.

2008 Mar 12 02:28 AM

[nukldrager:]

Just a band aid on a festering wound. Pseudo-fed relief.

2008 Mar 12 11:44 AM

[Mr. G:]

The current Fed action of taking collateral for cheaper money is probably designed to stimulate the banks to start lending money, otherwise, the previous rate cuts are meaningless and the attempted stimulation will be to no avail. Our GDP seems on a precarios balance between FED action, bank lending policies, and economic prefomance. No easy answer, but I applaud the FED for trying and Bernanke really cant do much more if the banks dont respond due to their huge writedowns.

2008 Mar 12 08:57 PM