"The Federal Reserve took two new steps to unfreeze credit for homebuyers, consumers and small businesses"

I was going to talk about a portrait of Bernanke I just read, but I can't get past Bloomberg, the FT, and the NY Times much these days. Too much good stuff. From Bloomberg ( Who owns this site? It's excellent.):

"The Federal Reserve took two new steps to unfreeze credit for homebuyers, consumers and small businesses, committing up to $800 billion. "

That's one small step for homebuyers, two...

"The central bank will purchase as much as $600 billion in debt issued or backed by government-chartered housing-finance companies. It will also set up a program of $200 billion to support consumer and small-business loans, the Fed said in statements today in Washington. "

I hate to harp on this, but this sounds like a credit stimulus plan, which I was arguing TARP should be, and Paulson just said "no" to. So, the Fed will:
1) Buy up to, it doesn't say it will, $600 billion in debt to help housing
2) Start a new program, which will outlive all of us, with $200 billion for average people and small businesses.

How about:
3) Give $100 billion to Don the libertarian Democrat to fund his blog and publish his novels, thereby rendering humanity giddy with joy.

"With today’s announcement, the central bank is starting to use some of the unorthodox policy tools that Chairman Ben S. Bernanke outlined as a Fed governor six years ago. Policy makers are aiming to prevent a financial collapse and stamp out the threat of deflation. "

Unorthodox Policy Tools. That has comic potential. That must mean that they've never done this before, and perhaps had denied in the strongest terms that they ever would do it.

“They’re trying to put funds into the system, trying to unfreeze these markets,” said William Poole, the former St. Louis Fed president, in an interview with Bloomberg Television. “Clearly, the Fed and the Treasury are beginning to take a large amount of credit risk.”

Poole again! What the hell. Does he comment for a living? Or is he just a useful fiction, like "The man in the street"? At least he's not qualifying every sentence, although, by saying "trying", he's making damned sure nobody holds him to account as predicting that these moves will work.

"The Fed will purchase up to $100 billion in direct debt of Fannie Mae, Freddie Mac and the Federal Home Loan Banks and up to $500 billion of mortgage-backed securities backed by Fannie, Freddie and Ginnie Mae, the statement said. Treasury Secretary Henry Paulson said at a press conference that $200 billion is just the “starting point” for the asset-backed securities program.

“The economy is turning down pretty dramatically,” he said. “It’s very important that lending continue to be available.”

Too bad the banks can't do any lending, Hank. Didn't Dana Perino claim that's what banks are for? And we all know that she's a walking dictionary. I need to cut Dana some slack.

Anyway, it looks like that $600 billion is going to Fannie/Freddie, that lucky couple.

“This action is being taken to reduce the cost and increase the availability of credit for the purchase of houses, which in turn should support housing markets and foster improved conditions in financial markets more generally,” the Fed said. "

So:
1) We give $600 billion to Fannie/Freddie, then:
2) The cost of buying a house will go down and
3) There will be more mortgages,then:
4) The housing market should stabilize ( I just had to look up the spelling of "stabilize" ), then:
5) The economy will get better

I hope so as well.

"Fannie and Freddie bonds rallied. The yield premium on Fannie Mae’s five-year debt over similar-maturity Treasuries tumbled 21.5 basis points to 114.7 basis points as of 8:35 a.m. in New York, according to data compiled by Bloomberg. A basis point is 0.01 percentage point. "

"Hear Hear!", they cried, on the steps of Federal Reserve building ( I actually looked it up to verify that it had steps. I never do that in my novels. In writing my novels, I just say to myself, "Well, if it doesn't, it should". )

“The cheaper that they could issue their debt, the more aggressively they should be able to buy mortgages in the secondary market,” said Alan Bosworth, director of agency trading at Vining Sparks in Memphis, Tennessee. "

I suppose that they could also afford to buy more.

"The Fed may hold the Fannie and Freddie debt and securities until they mature or sell them, with plans to be determined, government officials said on a conference call with reporters. "

Just get the money back.

"The U.S. officials, speaking on condition of anonymity, said they don’t see the Fed purchases of mortgage bonds as a way of “quantitative easing,” or using central bank policy to add reserves to the banking system when interest rates are very low, even though the purchases will have that effect. "

Why didn't they just ask Poole? He's not shy.

"Quantitative easing was a tool of monetary policy that the Bank of Japan used to fight deflation in the early 2000s.

The BOJ had been maintaining short-term interest rates at close to their minimum attainable zero values since 1999. More recently, the BOJ has also been flooding commercial banks with excess liquidity to promote private lending, leaving commercial banks with large stocks of excess reserves, and therefore little risk of a liquidity shortage.^[1]

The BOJ accomplished this by buying much more government bonds than would be required to set the interest rate to zero. It also bought asset-backed securities, equities and extended the terms of its commercial paper purchasing operation."

I'm not sure why, if it's going to have that effect, it wouldn't be considered a positive side effect.

"Separately, under the new Term Asset-Backed Securities Loan Facility, the Fed will lend up to $200 billion on a non-recourse basis to holders of AAA rated asset-backed securities backed by “newly and recently originated” loans, such as for education, automobiles, credit cards and loans guaranteed by the Small Business Administration, the Fed said.

The Fed hopes to have the TALF running by February. Traditional investors in the asset-backed securities include securities lenders and bank-affiliated conduits, the government officials said.

The asset-backed securities program is similar to the Fed’s effort to bring down the cost of financing for commercial paper, the short-term debt companies issue to finance payrolls and other expenses, because it goes beyond banks."

The TALF is just Program 2 above.

“What the Fed has been trying to do is get a sense of what works and what doesn’t work,” said Derrick Wulf, who helps manage $70 billion in mostly fixed-income assets at Dwight Asset Management Co. in Burlington, Vermont. “One of the things that has worked is the commercial paper facility.”

Trial and error. That's the modus.

"Under the new lending program, known as the TALF, the New York Fed will auction a fixed amount of loans each month for a one-year term. Assets will be held in a special-purpose vehicle to be created by the Fed. The program will stop making new loans on Dec. 31, 2009, unless the Fed Board of Governors extends it.

Lenders providing credit under the TALF “must have agreed to comply with, or already be subject to,” executive- compensation restrictions in the October bailout law, the statement said."

More on TALF. I'm just keeping it for reference.

"The Fed will start buying the direct debt of government- sponsored enterprises -- Fannie, Freddie and a dozen federal home loan banks -- through primary dealers in government debt from next week. The purchases of mortgage-backed securities will be done through asset managers, and officials aim to begin the effort by year-end.

Purchases of both types of debt “are expected to take place over several quarters,” the Fed said."

That's the time frame.

Since it's trial and error, could someone please a tab on the results?