We have commented that there is limited actions that can be taken by the central bank during a credit crisis; however, the one action that can be helpful is providing liquidity to banks. The Term Auction Facility, TAF, whereby the Fed lends against different collateral can be very effective if funds are not available from other sources. The TAF has been raised to $50 billion for the March 10 and 24th auctions and the Fed has stated that it will make $100 billion available through repos.
These funds could be used by banks to finance the purchase of mortgage collateral by banks to make liquidity for others. With spreads so wide for even high quality collateral, this is an effective means of stabilizing the market. Of course, we will have to look at the Fed balance sheet to determine whether this action more than offsets the reduction in credit elsewhere.
These funds could be used by banks to finance the purchase of mortgage collateral by banks to make liquidity for others. With spreads so wide for even high quality collateral, this is an effective means of stabilizing the market. Of course, we will have to look at the Fed balance sheet to determine whether this action more than offsets the reduction in credit elsewhere.
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