Personal Finance Advice

Monday saw the stock market hit a two year low, but what a difference a day makes.  Stocks surged 3 percent for their largest gain in nearly five years after the Fed announced plans for a new $200 billion securities lending program that directly infuses liquidity to twenty of the nation’s largest lenders and investment banks.

Wall Street loves this move because the Fed is offering to accept as collateral, mortgage backed securities, in exchange for Treasury securities which banks will then be able to resell on secondary markets for cash.  Basically the Fed is almost acting as a buyer of last resort, providing a market where none exists.

Whether this plan is large enough in scope remains to be seen but it is a step in the right direction.  Another positive note is that the Fed was able to coordinate this move with other central banks in Canada and Europe, who also plan to inject their banking systems with liquidity, albeit at a much smaller scale, approximately $45 billion.

This move also takes some pressure off of the Fed, whom many have been calling for an emergency rate cut ahead of their regularly scheduled meeting next week.  The futures market is predicting a 75 basis point cut after that meeting.

While this is a nice short term fix, that’s all it really is.  The Fed would prefer that banks lend each other money but right now they don’t trust one another.  The problem is no one wants to buy securitized debt. 

The whole point of securitized debt is to provide short term liquidity for an asset that is illiquid in nature, like a long term loan.  Credit markets are in shambles because banks are stuck with all this debt that they either can’t sell or if they can, at seriously discounted prices.