We will admit that we were among the carpers and the skeptics of the early leaks supposedly coming from the Federal Reserve last night. The refusal to slash interest rates by more than the minimal amount struck as a sign of intellectual health. Ben Bernanke, at least for a few hours, had seemed to discover his place among the vertebrates once more.
So when word began to spread through the tavern where we spend probably too many of our evenings that the Federal Reserve was still talking after its meeting—and specifically talking about how the rate cuts were not the sum of its efforts to create looser credit markets—we were disappointed. Had it only taken one day of downward facing Dow to strip the governors of the Federal Reserve of their resolve?
Of course it hadn't. Apparently the leaks last night were exactly right—the markets had wrongly assumed that the Fed had exhausted its efforts on their behalf with the rate cuts. There really was more in the works.
This morning we learned that the Fed had made a heretofore secret accord with the European Central Bank, the Bank of England, The Bank of Canada and the Swiss National Bank. In addition, the Fed would begin buying up a wider variety of bonds, trading dollars for illiquid debt securities. Under this new "term auction facility" the Fed will lend at least $40 billion and potentially far more through four separate auctions starting this week. The rates available to banks at these auctions will be far below those charged on direct loans from the Fed through its "discount window." Let's call it a super-discount window.
It is still a bit unclear what it is the Fed plans to buy with these new "temporary auctions" or what the news lines of credit with the central bankers of Europe will be used for. But this lack of clarity did not stop the futures markets from jumping for joy almost the instant the news was announced or equities traders from pushing the Dow Jones index up over two hundred points as soon as they could manage it.
We hate to spoil the party so we won't insist on this point too loudly. But this does strike us as a bit of desperation, both on the part of the Federal Reserve and investors. The Fed has said that it is undertaking these extraordinary measures in order to alleviate the "elevated pressure" on credit markets. What that metaphor conceals is that those who had sought profits speculating in the markets for debt securities and derivatives but are now concerned about their balance sheets and capital reserves are being bribed by risk-free opportunities not to dump the securities and derivatives that would reduce them to worthlessness.
Let's not dwell on it. Tis the holiday season after all. Pour the punch a bit stronger, fill the cups with credit egg-nog. Let's all go dancing under the mistletoe. At the very least, the coordination involved with the move will likely pull Libor back toward where the central bankers believe it should be. We'll worry about the hangovers after New Year's day.