Monetary Policy -- Plan B (Bailout)

Today the Fed and a quartet of other central banks announced
a coordinated effort to accelerate the process of rebuilding
credit driven liquidity. The details have been widely reported,
so no need to repeat them here. But, observations are in
order.

The $40 billion term auction facility plus the $24 billion
currency swap arrangements adds substantially to monetary
liquidity. This is a plus for the economy down the road. It is
also mildly inflationary and brings the Fed to the brink of
abandoning a policy of bringing down the long term growth of
monetary liquidity from the high levels of the bubble years
(1992 - 2003). It is a setback for the Fed.

Creation of this facility partially separates the liqudity
aspect of monetary policy from the rate setting aspect. This
will complicate the process of analyzing policy.

The TAF gives the Fed substantial flexibility to manage liquidity
in the system independent of month to month FOMC activity geared
to managing the FFR%.

Because the Fed can increase the $ amount of these facilities if
needed, it is a strong prompt to the banks to resume a more
normal level of lending and to service qualified credits. The
Fed is obviously unhappy with the slow pace of private sector
credit / funding growth and wants to protect against defaltion
of asset values secured by credit. Time will tell how well it
works.

A strong positive response from the banking system would allow
the Fed to roll up these faciliities easily and return to normal
operations. But, why jump ahead of the story?

The de-linking of this announcement today from the FOMC meeting
relects longstanding protocol, creates a new protocol and was
also an expression of Fed disdain for The Street and the banks
who abandoned any semblance of credit underwriting integrity
in the the CDO market. I would have enjoyed "perp walks" for
banks to the discount window instead of this more anonymous
arrangement.