tag:blogger.com,1999:blog-3782644139927778760.post-86674767468818760492008-03-09T21:44:00.000-04:002008-03-09T21:44:00.000-04:00It's an important observation on the structure of the Fed balance sheet, but the effect is a far cry from SWF capital injections.<BR/><BR/>This is debt. Equity isn't collateralized.<BR/><BR/>TAF is an extension of the discount window in terms of the quality of acceptable collateral and its valuation. The Fed has the option of changing collateral valuation parameters as required by market conditions, on rollover dates.<BR/><BR/>These are horrendous markets, but it’s a gross exaggeration to say that the Fed is nationalizing banks via TAF. If that happens, it’s a later step.<BR/><BR/>The interesting point that no one has commented on is the existence of a Fed balance sheet constraint on limits to the outstanding TAF.<BR/><BR/>The Fed is limited by the size of the liability side. It doesn't 'force feed' currency note into the system beyond the demand of the banks and the public for currency. And it has no room to expand bank reserve balances in aggregate of it wants to maintain control over the level of the funds rate. That's why it’s 'sterilizing' now.<BR/><BR/>So the upper limit to TAF is essentially the size of the Fed balance sheet now, allowing for natural growth in currency demands of the banks and the public.<BR/><BR/>Beyond that, the Fed couldn't 'sterilize' by selling other assets. It would have to start issuing its own liabilities, such as the sterilization bonds issued by the PBOC used to offset their foreign exchange purchases.Anonymousnoreply@blogger.com