Fed’s Emergency Efforts Winding Down Amid Market Approval
In with a bang, out with a whimper.
And so it goes for a run of emergency lending programs hatched by the Federal Reserve over the course of the worst financial crisis since the Fantastic Depression. Monday saw the end of initiatives aimed at supporting various parts of the money-making-paper market, where companies get small-term financing, along with programs to ensure key investment banks could get liquidity. Also shuttered: currency swap arrangement the Fed had with other major central banks.
Over the next several months other emergency lending programs will also make their last stands. The end of these facilities represents a go by plot makers to normalize their relationship with healing financial markets. Emergency aid withdrawn, an eventual tightening in monetary plot will follow.
As observers judge the now shuttered Fed facilities, they by and large approve, saying the programs were a necessary response to a financial crisis no living plot maker had ever confronted. “The whole was certainly greater than the sum of the parts,” said Lou Crandall, chief economist with Wrightson ICAP.
Analysts acknowledge evaluating the programs is hard. Agreed the chaos the programs were birthed into, and the unique nature of many of these upheavals, grading the effort is a challenge.
“The Fed implemented these programs in response to market turbulence,” said James Hamilton, an economics professor with the University of California, San Diego. Ultimately, it may be impossible to unpick whether specific markets healed themselves, whether the Fed programs simply place a floor under the pain, or if central bank efforts were the catalyst for a turnaround, he said.
Several Fed research ID released over recent months have been upbeat and say the central bank offered a valuable helping hand to market participants. And even with the challenge of identifying the programs’ specific successes, many note the Fed’s currency arrangements with other central banks were decidedly worthwhile.
A recent paper from the New York Fed prominent “the dollar swap lines among central banks were effective at reducing the dollar funding pressures abroad and the stresses in money markets.” Others said the arrangements helped hold together the international financial system and mount a critical defense of the dollar’s reserve currency reputation. The dollar swap arrangements were huge, rivaling the Fed’s other largest efforts, and peaked at nearly $600 billion in late 2008.
No one expects markets to feel any sting from bringing up the rear the programs that close Monday. In practical terms, the programs were already over, having been small used for some time. As financial markets have recovered, Wall Street investors have been able to find the money they want privately, at more advantageous terms — a development welcomed by plot makers.
Some on Wall Street welcomed the end of the money-making-paper programs. They believe that those who were still actively participating in the effort at the end were those who shouldn’t have been issuing small-term debt anyhow, agreed their apparent inability to find an investor other than the Fed to buy their offerings.
Economists see small opportunity the emergency efforts will be modified and in some way place back in the Fed’s everyday toolkit. That’s largely because the initiatives only existed to fill gaps highly troubled markets were unable to cover themselves. An open debate may surround the controversial mortgage-buying program that is set to end in March, but nothing like that surrounds the emergency-lending efforts.
“I would certainly urge against” bringing these programs back, Hamilton said. “We want to be fixing these problems in a way the central bank never again needs to take these actions.”