Hare Krishna, Krishna Guha, Guha Krishna, Hare Hare

Well, well, what have we here in the Financial Times?

“Fed to overhaul provision of market liquidity”

I said yesterday the Fed was up to something; that $10B they extracted is bound to come back somehow. Now we are beginning to see how. I might wind up claiming victory on my discount window prediction (“something more dramatic”) after all.

(Well, that was quick. FRB press release. They even have a TAF FAQ.)

The author of the FT piece is “Krishna Guha”. Now where have I heard that name before? Oh, right! Back in September he was already on this very story…

Update 11:00

Floyd Norris of NYT smells fear at the Fed.

Reading the FRB press release, this appears to be very similar to the discount window. The same parties (“depository institutions”; i.e., banks, S&Ls, thrifts, but not investment banks) are eligible to participate. The same collateral will be accepted. The difference is that instead of institutions originating the process by coming to the discount window, the Fed will forcibly inject liquidity via an auction. Apparently, the discount window carries a “stigma”; using it smacks of desperation, and banks don’t like to appear desperate for some reason. This new Term Auction Facility may not have the same stigma, since the money is being forced into the system anyway.

In short, this move is not as dramatic as it sounded at first. It may help stabilize the real banking system, which is good. But the problems in the credit markets go far beyond that. If and when the Fed extends this facility beyond depository institutions, then things will start to get really interesting.