Faced with crisis, the Fed innovates

Latest move different in scale and ambition from what it has attempted so far THE US Federal Reserve’s new Term Securities Lending Facility is arguably the boldest and most innovative step taken so far to clear the logjam in the credit markets since the US sub-prime crisis blew up last August. Let’s look closely at what the Fed has essentially done. It has agreed to lend US$200 billion in the form of Treasury securities to primary dealers (and through them, to other financial institutions) for 28 days against collateral that includes not only US federal government agency debt (including mortgage-backed securities, or MBS), but also private AAA-rated MBS. There are three key points to note here about how the Fed’s actions are different from what it has done before. First, the amount the Fed is willing to lend has increased significantly. When it first announced its Term Auction Facility in December (aimed at easing liquidity in the cred...