Decoder: Term Auction Facility
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Steve Chiotakis: Last week, the Federal Reserve made more than $100 billion in short-term loans. Yet another way to loosen the credit markets, the move part of something the Fed calls the Term Auction Facility. It’s odd-sounding, but very important to the financial world. And it’s the subject of our latest Marketplace Decoder. Here’s Janet Babin.
Janet Babin: Even financial types think the Term Auction Facility is tough territory:
Jaret Seiberg: I can’t believe you’re actually doing a story on the Term Auction Facilities — you’re very brave.
That’s Jaret Seiberg, a financial analyst at The Stanford Group. I told him it’s Marketplace listeners who are brave. They want to know what this stuff is.
So he goes on. The Federal Reserve has always lent banks emergency cash through its Discount Window. The Term Auction Facility came into the mix when things got crazy about a year ago. It also gives banks loans, but the terms are longer — sometimes up to 84 days.
Seiberg: The large banks submit bids to the Fed on how much they’re willing to pay to get that money. And the Federal Reserve shifts through the bids and decides who the winners are.
The auction’s happen every two weeks. And Seiberg says we should be glad they do:
Seiberg: We should be singing hallelujah. Because this was a desperately needed solution to a liquidity crunch at the banks.
If the banks don’t have cash to lend, the economy screeches to a halt.
Professor Bill Brown at Duke Law School says its like whiney kids at the beach when all but one of their toys gets washed away:
Bill Brown: And so what the Fed is doing with this facility is saying we know that you’re no longer sharing toys, because you only have one toy each. We’re going to give you more toys.
In hopes that if banks get enough toys, they’ll start sharing again. But so far, that hasn’t happened, even though the Fed has been lending $150 billion every two weeks through the TAF program.
Brown: We should be worried that the Fed is exploding its balance sheet, we should be worried that things aren’t getting better, even though we keep trying to throw more money at it.
Yeah, can’t we all just go back to the beach? Maybe when the Fed closes the Term Auction Facility. That would be a sign that the economic tide has shifted.
I’m Janet Babin for Marketplace.
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