Bernanke Invents a New Weapon

Do you know your TAF from your TSLF? Frankly, it doesn't matter if you don't. Think of Ben Bernanke as action hero: every time the credit markets seize up and threaten to bring down the US financial system, he pulls out a new weapon. First it was rate cuts, then it was the Term Auction Facility, now it's the Term Securities Lending Facility, or, as Paul Krugman calls it, "an attempt to give the market a REALLY BIG slap in the face".

The markets are up today, of course: they love it when Bernanke fires up his helicopter. And I'm actually reasonably hopeful that this latest liquidity injection* might work for more than a few days, if only because the securities hit in the latest credit crunch (agencies, municipals bonds) are genuinely remote from any real risk of default.

The FT has links to all the other central banks releasing statements at the same time; Mish, meanwhile, worries that with this latest action Bernanke is "running out of bullets". Again, I'm slightly more sanguine: the Fed seems to be able to cast new bullets at will. They're not enough to prevent a recession, of course. But they might at least be enough to keep the markets functioning relatively smoothly on the way down.

*Yes, a liquidity injection. The action doesn't increase the total money supply - it's what's known as "sterilized" - but it does increase the amount of liquid cash in the banking system.

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