This is weird:

From Fed Teams With Central Banks on Credit:

The Federal Reserve announced Wednesday it was coordinating with other central banks to deal with the global credit crunch. Wall Street rallied after the surprise announcement.

In a statement timed before the start of trading in New York, the Fed said it planned to offer $40 billion in emergency funds to banks next week through an auction process.

[A] Fed official, who spoke to reporters on a conference call, said that the adverse reaction of Wall Street on Wednesday had nothing to do with the timing of the announcement.

Wow! Hang on to your hats. $40 billion. Such an astronomical sum. And the timing had nothing to do with yesterday's big down day. Well, maybe.

The Fed said that it was creating a temporary auction facility to make funds available to banks ...

"This is not about particular financial institutions with particular problems. It is about market functioning," said a senior Federal Reserve official ...

It's not for Countrywide or Citibank (or so they say).

The Fed cut a key interest rate on Wednesday but by a quarter-point rather than the bolder half-point move that many investors had hoped for. Economists looked more favorably on Wednesday's action, although they cautioned that the Fed's experiment at finding another way to inject cash into the banking system had not been tested. "Clearly, the Fed is feeling its way in the dark here. Current conditions are unprecedented in modern times," said Ian Shepherdson, chief U.S. economist at High Frequency Economics.

It's about injecting cash into the banking system, but nobody's sure how to do it.

Analysts said the use of auctions to try to get more money into the banking system was an acknowledgment that efforts to spur direct loans from the Fed to banks through the Fed's discount window had not worked as well as hoped because of banks' fears that investors could become worried if they started utilizing the Fed's discount window to any large extent.

Investors would worry if a bank used the discount window? First of all, that doesn't sound right. Since when did investors worry about banks using the discount window? If true, that means the Fed is working to reassure Wall Street. Is that their purpose in life?

The Fed said that commercial banks would be able to bid at auction for funds that would be drawn from the Temporary Auction Facility. The money would be intended to help cash-strapped banks raise money needed to keep making loans to businesses and consumers.

The action represented another step by the Fed to deal with a serious credit crunch stemming from the tightening of bank lending standards in the wake of multibillion dollar losses from a rising tide of defaults on mortgage loans.

Banks need money to keep making loans that they aren't making anymore because of tighter lending standards. Check. Is this a signal to banks to resume issuing Liar Loans or those with a credit score of 450? Sounds like an attempt to patch/reinflate the housing bubble.

The Fed said that the new auction process should "help promote the efficient dissemination of liquidity" when other lines of credit were "under stress." The experience gained from the four scheduled auctions would be "helpful in assessing the potential usefulness" of this new process to provide funds to U.S. banks, the central bank said.

Great, "the experience gained will be helpful in addressing its usefulness". So, this exercise is an experiment with unclear effectiveness. Either that, or just a PR move to assuage the markets.

It said that the temporary swap arrangements being set up would provide up to $20 billion in reserves for the European Central Bank and up to $4 billion for the Swiss National Bank. The reserves would be available for up to six months.

$4 billion is Swiss francs! Feel the power. But here's the last line in the report:

Many businesses and consumers report rising trouble in obtaining loans as banks become more fearful about extending credit in the wake of a surge in bad loans stemming from the U.S. housing crisis.

Except for housing, consumers have no difficulty getting credit (credit-cards, auto loans), so what's that all about?

UPDATE: Felix Salmon recommends these explanations (1 2) for today's announcement. Apparently $40 bil is a big deal, although the secrecy aspect is not encouraging (which banks tap it will not be disclosed).


posted by Quiddity at 12/12/2007 09:43:00 AM