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SPENCER PLATT / Getty Images
The bronze bull in New York's financial district gets a touch on a bullish day for Wall Street. The stock market staged its biggest rally in five years. Story, A1.
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Economic Give, Take
WASHINGTON - The Federal Reserve said yesterday that it would provide up to $200 billion in short-term loans to banks. In doing so, it will accept a wide range of mortgage bonds as collateral in a bid to boost credit markets, keep housing finance alive, and avoid a recession.
In a short statement, the Fed noted the increasing "pressures in some of these markets" and announced the new loans and a coordinated loan-financing effort with the central banks of Canada, England, Switzerland and the European Union.
Stocks, which had slumped in the last three sessions, soared throughout the day on news of the Fed's action. The Dow Jones industrial average closed up 416.66 points. The Standard & Poor's 500 was up 47.28, and the Nasdaq rose 86.42.
"The Fed's action is creative and laudable and should help alleviate the worst of the liquidity problems currently plaguing the financial system," said Mark Zandi, chief economist at Moody's Economy.com, a forecaster in West Chester, Pa.
Although the announcement was about credit markets, mortgage bonds are at the heart of the economy's current problems. Mortgage lending has virtually seized up, and the mortgage-finance problems have spread more broadly to credit markets in recent weeks, affecting lending for cars, college loans and corporate finance.
While Wall Street seemed pleased with the Fed's action, some think that it may not be enough to fix the fiscal troubles roiling the housing and credit markets. Some even have suggested more direct government intervention, much like what took place in the savings-and-loan crisis of the late 1980s. Taxpayers eventually took ownership of 35,000 properties worth $10 billion.
In yesterday's bid to ease market fears, the Fed said it would begin weekly auctions March 27 at which it would provide 28-day loans to banks and securities dealers. It will swap Treasury securities from its vast reserves for a wide range of collateral, including mortgage bonds, also called mortgage-backed securities.
By allowing financial institutions to put up mortgage-backed securities - for which there is little market appetite - in return for safe Treasury securities that are in high demand, the Fed hopes to take pressure off financial companies and make them more inclined to lend to individuals and businesses.
Thus, the Fed will accept as collateral the very bonds that financial markets are shunning, both agency-backed mortgage bonds - those issued by government-supported entities Freddie Mac and Fannie Mae - and the highest-rated mortgage bonds issued by the private sector.
The Fed hopes to shore up confidence in Fannie and Freddie because publicly traded shares of these mortgage giants have plunged lately.
Investors are afraid that sinking home prices will make it difficult to determine the real value of mortgage bonds. That is what happened to private-sector mortgage bonds, the source of much of today's turmoil in financial markets.
The Fed's action is a "full-scale assault" to ensure investor confidence will not erode further, and it might prompt a rebound, said Brian Bethune, of Global Insight Inc., of Lexington, Mass.
If the Fed is willing to accept mortgage bonds, the reasoning goes, investors will feel they have less reason to be fearful. The Fed also will create a de facto price for the privately issued mortgage bonds, whose value has been hard to determine of late. That is important because without the market for mortgage bonds working properly, banks are wary of issuing new home loans, consumers suffer, and home prices fall further.
