The US Federal Reserve, who is struggling to contain economic confidence in the credit markets will for the “first time” lend treasuries in exchange for debt that includes mortgage backed securities.
In a statement made in Washington, the Federal Reserve, plans to make up to $200B available through weekly auctions. On conditions of anonymity, some officials said that this amount may also be increased - as needed.
The Fed also coordinated the effort with Europe and Canada who also plans to inject up to $45B into their banking systems.
US stocks rallied on optimism that this action will help relieve the condition in the credit markets. As of this writing, the Dow increased 261.90 from previous days closing.
In effect, this shows the Fed’s continuing concern in the credit markets and it is doing as much as it can to help increase liquidity in the financial markets and help relieve some pain in the US mortgage securities.
Terms
The Fed said it will lend Treasuries for 28 day periods in return for debt which includes AAA rated mortgage backed securities sold by Fannie Mae, Freddie Mac (two of the major US mortgage securities firm) and by other banks. It will be held under a new program called, the Term Securities Lending Facility, to so called primary dealers and to the main banks and securities firms that trades directly with the central bank.
This would allow dealers to switch debt that is less liquid for US government securities that are easily tradable. Officials said that asset values will be discounted in exchange for treasuries, though the details are still under construction.
Other Central Banks
In line with the US Federal Reserve, the European Central Bank (ECB) will lend up to $15B for 28 days. The Bank of England will offer $20B three month loans March 18 and hold another auction April 18. The Bank of Canada plans to purchase $4B of securities for 28 days.
The Fed will not make outright purchases for mortgage securities as buying it directly would affect prices.
In laymans terms:
This means that with US Federal Reserve injecting up to $200B with the intention to increase as needed, the ECB injecting up to $15B for 28 days, the Bank of England offering three-month loans and the Bank of Canada who intends to purchase $4B of securities for 28 days - would help increase liquidity and maintain global economic growth.
This has already created a rally in the US markets and Europe. Overnight the Australian index futures increased around 175.3 points and the Japanese futures increased about 315 points.
This may be really good short-term but long-term is it really good for the local and global economy?
In the next post, I will talk about where the Australian banks are at the moment.
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