As I understand it, the Fed inject liquidity with something called repurchase agreement. This is when they create money on their computer out of thin air, then they lend it to banks at a certain interest rate. These loans are pretty short and usually have to be repaid within 7 days. The ones today were three days loans.
How does fed add liquidity to the financial markets?
- Thread starter mark77418
- Start date
So, we had a problem that was caused by too much liquidity, so we solved it with some more liquidity. I used to do that in college, I would drink too much and get hung over, so I would cure it with more alcohol. That didn't end well.
Unlike previous times when the Fed enters the market to buy Treasuries to inject liquidity, this time is very different.
The Federal Reserve bought the subprime loans ! They took the CDO as collateral for the loans.
The U.S. Federal Govt will now own the subprime loans if the borrowers default.
It is a bail-out for Mortgage/Investment Banks, Hedge Funds, and Overleveraged Fat Cats at the expense of the average Joe.
The Federal Reserve bought the subprime loans ! They took the CDO as collateral for the loans.
The U.S. Federal Govt will now own the subprime loans if the borrowers default.
It is a bail-out for Mortgage/Investment Banks, Hedge Funds, and Overleveraged Fat Cats at the expense of the average Joe.
Barney: I'll show you! I'm going to take these helicopter lessons.
Homer: Wait a minute, Barney. You've got to be sober to fly. I mean, it's not like driving a car.
Homer: Wait a minute, Barney. You've got to be sober to fly. I mean, it's not like driving a car.
adding liquidity means lower rates.
so the fed can lower the discount rate at the window.
lower capital requirements or change what type of capital is acceptable for banks.
buy treasuries.
but what the fed should do is accept subprime paper as collateral for loans. that establishes a floor price for it. and, to reduce moral hazard, should raise the discount rate to penalize those firms wanting to offload that paper
so the fed can lower the discount rate at the window.
lower capital requirements or change what type of capital is acceptable for banks.
buy treasuries.
but what the fed should do is accept subprime paper as collateral for loans. that establishes a floor price for it. and, to reduce moral hazard, should raise the discount rate to penalize those firms wanting to offload that paper