Fed Takes New Direction to Curb Crisis

The Federal Reserve announced that it would attempt to inject liquidity into the credit markets by lending $200 billion in return for bad mortgage debt. Essentially, Ben Bernanke’s organization is trying to create a market for these mortgages that haven’t been traded in months (since nobody knows how much further they will decline). The hope is that the trading will enable traders to price these securities and begin trading them themselves.

“It is a strong attempt to stabilize a crisis,” Henry Kaufman, president of Henry Kaufman & Co. in New York and the former chief economist at Salomon Brothers Inc., said in a Bloomberg Radio interview. “It is a further recognition that this credit crisis is deeper and wider, and has been exceedingly opaque, in contrast to earlier credit crises.”

The new initiative goes a step beyond its past efforts because the Fed can now inject liquidity without flooding the banking system with cash. Rather, they are trying to stop the dangerous cycle that is now causing huge losses in the mortgage and banking industries. Whether or not this new plan will work remains to be seen, but many investors are clearly bullish given the strong move upwards yesterday in the stock markets.

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