Tuesday, October 7, 2008

Fed announces TAF auction dates

Does anybody really care? Anyone see how the air went out of the futures when they announced these new dates?

Anyone go to the Federal Reserve Bank of San Fransico's website and read John Taylor's paper, "A Black Swan in the Money Market?"

Here's the first page:

At the center of the financial market crisis of 2007-2008 was a highly unusual jump inspreads between the overnight inter-bank lending rate and term London inter-bank offerrates (Libor). Because many private loans are linked to Libor rates, the sharp increase inthese spreads raised the cost of borrowing and interfered with monetarypolicy. Thewidening spreads became a major focus of the Federal Reserve, which took severalactions—including the introduction of a new term auction facility (TAF)—to reducethem. This paper documents these developments and, using a no-arbitrage model of the term structure, tests various explanations, including increased risk and greater liquidity demands, while controlling for expectations of future interest rates. We show that increased counterparty risk between banks contributed to the rise in spreads and find no empirical evidence that the TAF has reduced spreads. The results have implications for monetary policy and financial economics.

No wonder Bernanke is pushing the TAF. It doesn't work!


bob said...

Don’t forget bank shorts come back Thursday.

They will descend upon banks as a swarm of locusts.
The FED may want to keep their powder dry for this event.

Palmoni said...

Yes systemic risk everywhere!

Look what happened to BAC. 455 million shares at 22 to raise 10 billion.

But knock 15 points off the stock to do it!