The primary dealer credit facility was added by the Fed to the TAF and TSLF lending program. This allows borrowing by non-bank primary dealers from the Fed. Given the lack of liquidity in the mortgage market, this is an excellent means of providing financing for market making activity and may be the best way of providing some relief to the housing market while solving the liquidity gridlock on Wall Street. Lowering the cost of borrowing allows the Fed dropping of interest rates to be passed on the housing market. The spread on GNMA, FNMA, and Freddie mortgages have only widened since the end of the year, so cutting Fed funds has not been particularly effective. While there are added risks from the uncertainty in cash flows for mortgages, liquidity has been the key problem.
The $30 billion used to finance positions for the acquisition of Bear Stearns by JP Morgan also was a helpful action for the market. The unraveling of a large broker dealer would not help liquidity and would cause a lack confidence in the financial system, so providing lending is more important than lowering the overall rate. A bank run can be curtailed by providing funds not by changing the cost of funds. The discount rate cut while a minor action also puts this key bank lending rate closer to the Fed funds rate which makes it more attractive for banks to use as a funding facility. Forget moral hazard arguments now is the time to provide funds and Chairman Bernanke seems to have learned the lessons of the Great Depression well.
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