Friday, May 2, 2008

TAFs Rise to $75 Billion

Today, on the heels of the reduction in the Federal Funds Rate to 2%, the Fed raises TAF limits to $75 billion. They also expanded what they accept as collateral, from houses and commercial properties, to credit car debt, student loans, and car loans.

The term auction facility (TAF) was introduced by the Fed in December 2007 to address the credit freeze that happened late last year as a result of rampant subprime foreclosures, from teaser interest rate resets and a generally declining housing market. The TAF occurs every two weeks, and sells easy credit to banks, which they can lend out at higher rates. It began at $20 billion, then quickly rose to $50, and is now at $75 billion. It's a variant of their discount window, basically intended to allow cheaper access by lending institutions, with a broader range of collateral. This isn't necessarily a $75 billion increase in the money supply every two weeks, since what is given through TAFs is reduced at the discount window. But it does probably augment the money supply through expanding credit—still this is not necessarily an absolute increase if repayments and defaults exceed lending.

Now we face a credit freeze, for which the Fed had been engaging in aggressive maneuvering to undo, upping the ante precipitously since last September, both through decreasing the Federal Funds Rate and increasing TAF limits. Naturally, Wall Street will respond favorably. It really indictates, however, deep solvency problems that are not improving. I have more posts planned on the nature and cause of the credit freeze coming up shortly.

There is no evidence so far of increased printing. However, if the Fed trades sound treasuries for garbage assets as collateral which default, taxpayers are liable for the treasuries, and in essence this amounts to a veiled taxpayer bailout of bad bank loans.

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