Monday, March 08, 2010

Some Praise for the Fed

by Bill McBride on 3/08/2010 07:14:00 PM

I think the Fed deserves praise for the successful completion of the short-term liquidity facilities. As NY Fed Executive VP Brian Sack noted today:

With the wind-down of these short-term liquidity facilities, it is a good time to look back and assess their performance. The bottom line here is simple: These programs were an unquestionable success. We have witnessed a remarkable improvement in the functioning of short-term credit markets and an impressive recovery in the stability of large financial firms. While a whole range of government actions contributed to this recovery, giving financial institutions greater confidence about their access to funding, and that of their counterparties, was most likely a crucial step toward achieving stability.

Moreover, the exit from these facilities has been quite smooth. At their peak, these facilities provided more than $1.5 trillion of credit to the economy. Today, the remaining balance across them is around $20 billion. It is impressive that the Fed was able to remove itself from such a large amount of credit extension without creating any significant problems for financial markets or institutions. That success largely reflects the effective design of those programs, as most were structured to provide credit under terms that would be less and less appealing as markets renormalized. This design worked incredibly well, as activity in most of the facilities gradually declined to near zero, allowing the Fed to simply turn them off with no market disruption.
emphasis added
I've praised Chairman Bernanke several times (and thereby indirectly the entire Fed staff) about the liquidity facilities, while lambasting him on other aspects of his performance (like regulatory oversight). Every now and then I think we should pause and recognize a job well done.

I agree with Sack's assessment. These short-term liquidity facilities were creative, well designed, and very effective. Nice work and thanks!

Make sure to read his entire speech. It is the best explanation of the exit strategy I've read.