Some good links to the credit crisis

Some good links to the credit crisis:

1. How The Fed took the money out of monetary policy:

Here’s how a repurchase agreement would change the Fed’s balance sheet, after offsetting it with an open market operation:

Changes in the Fed's balance sheet after a $1,000M repurchase agreement, offset by an open market operation
Assets	US government securities	-1,000
	Repurchase agreements	+1,000
	Reverse repurchase agreements	0
	Direct loans	0
	Other assets	0
Liabilities	Currency in circulation	0 (-1,000 + 1,000)
	Reserve balances	0

Source: Federal Reserve, H.4.1 release.

By themselves, TAF loans would increase both assets and liabilities of the Fed, just like open market operations and repos. But, once again, the Fed partially offset those loans by selling securities and withdrawing cash from the system. Here’s the simplified balance sheet on December 26 and August 15:

Federal Reserve's balance sheet, $ millions
Assets		Aug. 15, 2007	Dec. 26, 2007
	US government securities	789,601	754,612
	Repurchase agreements	24,000	42,500
	Reverse repurchase agreements	-31,941	-40,542
	Term Auction Facility loans	0	20,000
	Direct loans	264	4,535
	Other assets	37,058	52,869
Liabilities	Currency in circulation	813,085	829,193
	Reserve balances	5,897	4,781

Source: Federal Reserve, H.4.1 release.

The first one is the Term Securities Lending Facility (TSLF), to open on March 27. At this new window, all primary dealers -all banks and brokers that trade in government securities with the Fed- are allowed to borrow up to $200bn of government securities for 28 days. Borrowers must pledge collateral for these loans, but the minimum quality of the assets is even lower than for the TAF (it includes federal agency debt, federal agency residential-mortgage-backed securities (MBS), and non-agency AAA/Aaa-rated private-label residential MBS).

The second institution is the Primary Dealer Credit Facility (PDCF), which started operating on March 17. This venue provides overnight loans to all primary dealers, backed by even riskier collateral: they accept all collateral eligible for repos, plus investment-grade corporate securities, municipal securities, MBS and asset-backed securities. With the PDCF, all primary dealers have de facto access to the discount window, from which only depository institutions could borrow before.

Here’s the balance Fed again, in December and after the PDCF opened:

Federal Reserve's balance sheet, $ millions
Assets		Dec. 26, 2007	Mar. 19, 2008
	US government securities	754,612	660,484
	Repurchase agreements	42,500	62,000
	Reverse repurchase agreements	-40,542	-46,143
	Term Auction Facility loans	20,000	80,000
	Primary Dealers Credit Facility	0	28,800
	Direct loans	4,535	125
	Other assets	52,869	36,603
Liabilities	Currency in circulation	829,193	818,362
	Reserve balances	4,781	3,507

Source: Federal Reserve, H.4.1 release.

With its new tools, the Fed has provided liquidity without printing much money. It has temporarily absorbed risky and illiquid securities, and supplied government securities, which are risk-free.

2. Mark Thoma's response to Steve Waldman's Credit Crisis for Kindergartener's:

"Couldn't the parents force the kids to keep their promises (under threat of a large penalty for default)? Either do what you promised, or incur some punishment that makes doing the chores the only reasonable choice? That seems a lot like the way a court would enforce contracts, so we need one of the kids to declare bankruptcy (or simply refuse to work and accept the punishment of having assets stripped, getting sent to their room, grounded, etc.) to get this going."

JP Morgan's decision to raise its price for Bear Stearns from $2 to $10 weakens the penalty effect.