20091110 John Walters

513 views

Published on

Federal Reserve Economist John Walters presents The Federal Reserve's Response to the Financial Crisis in Richmond, VA November 10, 2009 to the CFA Virginia Society

Published in: Economy & Finance, Business
0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total views
513
On SlideShare
0
From Embeds
0
Number of Embeds
2
Actions
Shares
0
Downloads
5
Comments
0
Likes
0
Embeds 0
No embeds

No notes for slide

20091110 John Walters

  1. 1. The Federal Reserve's Response to the Financial Crisis CFA Virginia Society – John Walter November 10, 2009
  2. 2. Percent Change, Year over Year 0 2 4 6 8 -10 -8 -6 -4 -2 10 12 1992 - Q1 1993 - Q1 1994 - Q1 1995 - Q1 Source: FHFA – Purchase Only -- SA 1996 - Q1 1997 - Q1 1998 - Q1 Housing Price Index 1999 - Q1 2000 - Q1 2001 - Q1 Year/Quarter 2002 - Q1 Housing Price Index 2003 - Q1 2004 - Q1 2005 - Q1 2006 - Q1 2007 - Q1 2008 - Q1 2009 - Q1 Confidential Information 2
  3. 3. Evolution of the Financial Crisis • Housing market problems shifted to financial markets in Summer 2007 – Losses at financial institutions across major countries • Unclear which financial institutions held worst loans • Mortgages had been sliced and resold • Uncertainty about how bad problems would become • Financial institutions and investors became highly conservative Confidential Information 3
  4. 4. TED Spread October 2004 – October 2009 Confidential Information 4
  5. 5. Relief Programs • Relief programs began in fall of 2007 • Goal of programs • Provide a transfusion • Provide funding to lenders – so that they would be willing to lend to consumers and businesses • The Federal Reserve introduced a total of 14 programs • FDIC has introduced several of its own as has the Treasury Confidential Information 5
  6. 6. Federal Reserve System Assets Source: Macroeconomic Advisers Confidential Information 6
  7. 7. Federal Reserve System Assets $, Billions 2600 2400 Term ABS Lending Total: $2,208 2200 Facility (TALF): $43 CPFF: $16 TAF: $139 2000 Currency AIG & Bear Stearns: Swaps: $32 $110 1800 Miscellaneous: $149 Discount 1600 Window: $23 1400 Agency MBS: $774 1200 1000 Total: $902 Agency Miscellaneous: $112 Debt: $147 800 600 Treasury Treasury 400 Securities: Securities: $790 $776 200 0 8/8/2007 11/4/2009 Notes: CPFF is the Commercial Paper Funding Facility. Money Market Facility (AMLF) holdings were less than $1 billion on 11/4. Source: Board of Governors/Haver Analytics Confidential Information 7
  8. 8. Loan Programs • Term Auction Facility (TAF) • Term loans (up to 84 days) to banks while funding markets are under stress • Primary Dealer Credit Facility (PDCF) • Discount window loans to Primary Dealers • ABCP Money Market Fund Liquidity Facility (AMLF) • Non-recourse loans to banks to fund purchases of asset- backed commercial paper from money market mutual funds • Money Market Funding Facility (MMFF) • Funding for private-sector SPV purchases of CDs, bank notes and commercial paper from money market funds Confidential Information 8
  9. 9. Loan Programs, continued • Term Asset-Backed Securities Loan Facility (TALF) • Non-recourse loans to purchasers of recently issued consumer or small business asset-backed securities • Term Securities Lending Facility (TSLF) • Treasury securities lent to Primary Dealers which provide less liquid securities as collateral • Central Bank Swap Lines • Reciprocal currency arrangements with a number of other central banks – U.S. dollars lent in exchange for foreign currencies Confidential Information 9
  10. 10. Asset Purchase Programs • Commercial Paper Funding Facility (CPFF) – Fed purchases (through an Special Purpose Vehicle) commercial paper directly from issuers • Purchase of agency debt • Purchases of agency mortgage-backed securities • Treasury Securities Purchase Program Confidential Information 10
  11. 11. Institution-Specific Assistance • Bear Stearns – Acquired a block of Bear Stearns troubled assets to facilitate JP Morgan Chase’s purchase of Bear Stearns • AIG – Loans, assets purchases, and liability acquisitions to prevent AIG’s failure • Citigroup and Bank America – Guaranteed specified blocks of assets Confidential Information 11
  12. 12. Loan Program –Term Auction Facility • Begun in December 2007 – currently $139 billion • Term loans (up to 84 days) vs. typical Fed lending – overnight • Avoids stigma associated with typical Fed lending Confidential Information 12
  13. 13. Asset Purchases – Agency MBS • Fed is purchasing mortgage-backed securities guaranteed by agencies: Fannie Mae, Freddie Mac, and Ginnie Mae • Currently the Fed holds $774 billion • Goal – to lower interest rates on home mortgages, thereby propping up house prices and improving conditions in financial markets Confidential Information 13
  14. 14. Federal Reserve System Assets $, Billions 2,400 2,400 2,200 Term ABS Lending Facility (TALF) 2,200 Commercial Paper Funding Facility 2,000 2,000 Other Assets 1,800 Maiden Lane I (Bear Stearns) 1,800 1,600 Primary Dealer Credit Facility 1,600 AIG (Includes Maiden Lane II & III) 1,400 1,400 ABCP Money Fund Liquidity Facility (AMLF) 1,200 1,200 Monetary Base 1,000 Agency 1,000 Holdings 800 800 TAF 600 600 Repos 400 TSLF 400 200 200 Treasuries xTSLF 0 0 8/07 10/07 12/07 2/08 4/08 6/08 8/08 10/08 12/08 2/09 4/09 6/09 8/09 10/09 Source: Board of Governors/Haver Analytics Confidential Information 14
  15. 15. Expanded Fed Assets Inflationary? • The asset purchases by the Fed have injected $1.1 trillion in reserves into banks. • Right now banks are happy to hold $1.1 trillion of excess reserves at the Fed. • At some point they will want to start lending them out. • When they do, money supply will start rising rapidly, inflation will result unless the Fed offsets. • Observers wonder what the Fed’s exit strategy is: how the Fed plans to avoid inflationary impacts from our huge balance sheet. • Bernanke has explained the Fed’s exit strategy Confidential Information 15
  16. 16. Exit Strategy • Borrowing will tend to decrease as the economy heals – already taking place – which will tend to lower reserves • Raise the rate we pay on reserves • Since our rate on reserves sets a floor for market rates – raising this rate will raise market rates – preventing inflation • Lower reserves – Bernanke’s suggestions (7/21/09 WSJ) • Reverses • Increased Treasury balances – leads to decreased reserves • Term bank deposits at the Fed • Sell some of Fed’s holdings Confidential Information 16
  17. 17. Conclusions • Broad declines in home prices led to defaults on loans. • Many financial firms were heavily exposed to home loans so they began to suffer financial problems. • Financial markets tightened up significantly. • Fed stepped in with a number of interventions meant to prop up. • Financial markets seem to be on the mend – use of several Fed programs has fallen. • At some point the Fed will begin to remove reserves – we have not reached that point yet Confidential Information 17

×