The Fed Confuses Everyone

You know how you hear that the Federal Reserve made some move that seems to be important but you don't understand anything about it?

You're not alone. Our favorite interbank lending money market trader, Will Aston-Reese, (should we coin a new acronym: ofiblmmtw?) has been studying the Fed's announcement this morning about a new "Money Market Investor Funding Facility."

For weeks, on our podcast, on the radio, Will and his partner in crime (or, at least, partner in interbank money market lending), Tom Corona, have been insisting that the Fed needs to promise to money market funds that they will buy any assets those funds can't sell.

We learned on the podcast yesterday that money market mutual funds won't buy commercial paper (a fancy kind of i.o.u.) from banks, because they can't turn around and sell those i.o.u.'s if there's trouble.

If the money market funds don't buy the i.o.u.s, the banks can't sell them to raise money. The banks are broke. The credit crisis deepens. The economy suffers.

Will and Tom say that's a perfect role for the Fed to step in and say: hey, if you can't sell the i.o.u., we'll buy it.

Now, the Fed says they'll do just what Will has been bucking for. But Will isn't convinced they've solved the problem. Why? Because the Fed's move is too darn confusing.

The Fed rules are hard even for this 25-year veteran of the money markets to understand.

What he does understand, he doesn't like:

This seems to be a big pain in the a** way to facilitate liquidity and how it actually will seems to be very confusing.

Oh, Fed, will you ever speak clearly?

It seems to take days after every big solution is announced to see any result. Why? Lawyers are scratching their heads trying to figure out what exactly is in the solution.

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