Ben Bernanke is trying to wrestle down a new dragon that’s stamping out credit across the economic landscape.
Already weary from shouldering a limping economy, and on full alert for more inflation wildfires, the Fed chief made an emergency wild-card play yesterday with the next best thing to a cash bailout of stalled credit markets.
In a two-pronged strategy, the Fed says it’ll spread billions in highly coveted T-bills to desperate Wall Streeters in retreat for safety – and separately pump as much as $200 billion into banks’ books to help purge their ledgers of toxic junk mortgage paper.
“Basically the Fed is starting to take the crappy paper off the Street,” said Bill King of Ramsey King Securities.
The separate, emergency T-bill distribution was seen as a serum for the quickly spreading crisis that has put investors, banks and brokerages into panic over being unable to protect their cash, which they’re refusing to lend out.
“Everyone wants T-bills because they’re the next best thing to cash – but there’s a huge shortage and you can’t find them anywhere,” said King.
Banks and investors are hoarding cash over a growing phobia sweeping the financial system against holding any debt. Instead of making loans or leveraged investments, they’re piling money into the safety of Treasury securities that mature in less than a year – hopefully, when they see the credit mess blowing over.
“No one wants to take the risks anymore because of the uncertainties” surrounding junk mortgages and their shaky derivatives, King said. Collapsed junk paper has already caused banks to write off nearly $200 billion, with many times that amount still lurking in ledgers.
Bernanke’s latest effort would allow banks to borrow varying amounts from the $200 billion pot, and collateralize these loans by using mortgage-backed bonds on their books, in effect removing them from their ledgers to gain more breathing room until lending can be revived.
When it’s time to pay back the special loans, banks can roll them over into new loans using another batch of junk paper siphoned from their books, steadily reducing their toxic exposures.
“It’s important that the Fed took steps to ease liquidity pressures since money markets are clearly suffering another bout of turmoil,” said Jane Caron, chief economic strategist at Dwight Asset Management.