Ok, this latest Federal Reserve action gets a little(understatement) complex, but to make it really, really simple, imagine you are at summer camp and you have a relay race. Everybody has a spoon and has to try to empty the bucket of water using their spoon into an empty bucket back at their line. Here are the challenges, the spoons aren't big enough to make a dent in the bucket holding the water in the center of the field, AND the bucket they are trying to transfer the water to is completely full!
What the Fed did is akin to giving the teams (banks) an additional bucket to use and bigger spoons as well. They can take on more mortgage debt because the Fed has removed some mortgage debt from them.
They are still only dealing with AAA rated securities, but this might actually help. Uncle Ben, (not my favorite) has actually pulled off a pretty well coordinated effort with this measure...the European Central Bank, Canada, and a couple "others" were all in on this relief effort.
We'll see if it works.
Comments (0)Subscribe to CommentsComment