NEWSLETTER
RSS
MOBILE
HELP
SHARE
Email Confirmation
Hoping for a Fed Encore
by Jeffrey Cane
Mar 12 2008
Mar 12 2008
World markets extend rally, but boost may be short-lived.
Asian and European markets rose sharply today, following an overnight rally on Wall Street.
Investors are optimistic that a plan by the Federal Reserve to lend $200 billion in Treasury securities in exchange for mortgage-backed securities and other debt can steady the turbulent credit markets.
The Nikkei index in Japan closed up 1.6 percent. Hong Kong ended up 1.9 percent. European markets are up more than 1 percent in midday trading. China's mainland markets were the exception, slumping on worries over accelerating inflation.
On Tuesday, U.S. stocks soared, with the benchmark Standard & Poor's 500-stock index rising 3.7 percent, for its biggest gain since October 2002. The Dow Jones industrial average rose 416.7 points, or 3.6 percent, its best day since March 2003.
The most important dimension of the new Fed auctions is that the accepted collateral has now been broadened to include Fannie Mae and Freddie Mac securities and triple-A residential mortgage-backed securities, the market for which has been nearly paralyzed by the housing crisis. And the loans will be for 28 days instead of overnight. The auctions will be held weekly, beginning March 27.
Ockham Research, on the Seeking Alpha blog, says, "This proposed solution will not eliminate the problems in the credit market, but our hope as well as the Fed's hope is that the injection of liquidity will make these big banks more able to withstand margin calls in the future."
Despite the rally, others say that the Fed plan will not be enough to correct a credit crisis triggered by the collapse of the housing market.
"They are essentially creating a $300 billion bank out of nothing," said Lou Crandall, chief economist at Wrightson ICAP, a financial research firm, told the New York Times. "It doesn't solve the fundamental issue, which is the decline of capital in the banking system."
A new $300 billion bank? Okay, but Citigroup has $2.2 trillion of assets on its balance sheet, notes Yves Smith on the Naked Capitalism.
"The Fed is simply too small an actor, relative to the global banking system, to have enough impact," she says.
Investors are optimistic that a plan by the Federal Reserve to lend $200 billion in Treasury securities in exchange for mortgage-backed securities and other debt can steady the turbulent credit markets.
The Nikkei index in Japan closed up 1.6 percent. Hong Kong ended up 1.9 percent. European markets are up more than 1 percent in midday trading. China's mainland markets were the exception, slumping on worries over accelerating inflation.
On Tuesday, U.S. stocks soared, with the benchmark Standard & Poor's 500-stock index rising 3.7 percent, for its biggest gain since October 2002. The Dow Jones industrial average rose 416.7 points, or 3.6 percent, its best day since March 2003.
The most important dimension of the new Fed auctions is that the accepted collateral has now been broadened to include Fannie Mae and Freddie Mac securities and triple-A residential mortgage-backed securities, the market for which has been nearly paralyzed by the housing crisis. And the loans will be for 28 days instead of overnight. The auctions will be held weekly, beginning March 27.
Ockham Research, on the Seeking Alpha blog, says, "This proposed solution will not eliminate the problems in the credit market, but our hope as well as the Fed's hope is that the injection of liquidity will make these big banks more able to withstand margin calls in the future."
Despite the rally, others say that the Fed plan will not be enough to correct a credit crisis triggered by the collapse of the housing market.
"They are essentially creating a $300 billion bank out of nothing," said Lou Crandall, chief economist at Wrightson ICAP, a financial research firm, told the New York Times. "It doesn't solve the fundamental issue, which is the decline of capital in the banking system."
A new $300 billion bank? Okay, but Citigroup has $2.2 trillion of assets on its balance sheet, notes Yves Smith on the Naked Capitalism.
"The Fed is simply too small an actor, relative to the global banking system, to have enough impact," she says.
Mobile