Forget the "R" Word, How About the "D" Word?

Please take a break from your regularly scheduled programming and check out what the Federal Reserve is up to. Although prohibited from buying mortgage-backed securities (the low-grade stuff that nobody else wants right now), the Fed proposes to do the next best thing. It will accept these securities as collateral for loans to banks stuck with them. Tricky, but will it work? Yesterday the stock market thought so; the Dow soared over 400 points.

Let us not, however, confuse a bear-market rally--typically violent but brief--with meaningful intervention. The Fed is offering up to $200 billion in this latest injection of liquidity, but that's like pissing in the ocean. The MBS market adds up to $6 trillion. Moreover, the Fed's new deal is a short-term lending facility that will need to roll over in 28 days. Wonder what the collateral will be worth by then.

These events in the credit markets are unprecedented in my lifetime and are beginning to draw comparisons to the 1930s. In the words of MSN's Jon Markman, "true panic has been kept at bay because the size of the potential losses has been underestimated at the same time that the redemptive power of government entities like the Federal Reserve has been overestimated."
Fed takes boldest action since the Depression to rescue US mortgage industry - Telegraph