Here I offer some thoughts on Bloomberg's account that the Fed has made inquiries with its dealers about the feasibility of a significant increase in the Fed's reverse repo operations.

First, a little background. The traditional tool of monetary policy is an open market purchase, in which the Fed purchased U.S. Treasury securities that had previously been held by someone in the private sector. The Fed would pay for those securities by crediting deposits in an account that the selling bank had with the Federal Reserve. These reserve deposits of banks represent claims that the bank could use, if it wished, to withdraw green currency from the Federal Reserve. The volume of reserve deposits historically was extremely important in determining the interest rate at which banks would lend the deposits to one another overnight. The traditional understanding of monetary policy was that the Fed would

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I found this by chance on CNN. It’s just plain scary to me. What do you think? Adam Troubled ASSET RELIEF PROGRAM Financial rescue plan aimed at restoring liquidity to the financial markets Program Committed Invested Description American International Group * See complete AIG bailout below $70 billion $69.8 billion $40 billion in preferred shares were converted to so-called non-cumulative shares that more closely resemble common stock. Treasury later offered another $30 billion in preferred shares for up to 5 years, in return for a 10% dividend. AIG: Where your money is going Asset Guarantee Program Citigroup Bank of America $12.5 billion $5 billion $7.5 billion $5 billion $5 billion $0 Funds set aside to backstop potential losses to government from Citigroup and Bank of America loans. Auto Supplier Support Program GM Supplier Receivables Chrysler Receivables $5 billion $3.5 billion $1.5 billion $5 billion $3.5 billion $1.5 billion Program to help stabilize ...

Lots of transactions went on in central banking over the past month or so, not only in the United States but in the UK and Europe. Quantitative easing is the game and, at least, the central bankers are getting more and more comfortable with this.

Credit is given to quantitative easing for the drop in the dollar LIBOR rate. The three month LIBOR now ranges between 50 and 60 basis points over the target Federal Funds rate chosen by the Federal Reserve. This is the lowest this spread has been in a long time. For the five years previous to September 2008, the time the financial markets collapsed, this spread averaged between 20 and 30 basis points.

This move reflects the efforts of the Bank of England and the European Central Bank to push short term interest rates lower and to engage in monetary actions that

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Never before have I learned so much so quickly from my readers as I have now — all just by reading the thousands of comments you have posted on my blog in the past week!

One of your key questions: Will the new Obama stimulus and banking bailouts succeed or fail?

What will be the immediate and ultimate consequences?

What should I do?

Today’s gala edition is my response.

But let’s not waste time digging for causes — the economic blunders of Washington, the financial greed of Wall Street, or the big debts and risky bets by almost everyone.

Let’s also not waste time pointing fingers — the Clinton administration for creating the tech bubble, the Bush administration for creating the housing bubble, or the Obama administration …

Yes, I saw the discouraging headlines. But I also see signs of hope in last week's economic news.

Let me begin by acknowledging the awful employment news. This was undeniably grim, though popular descriptions that BLS had reported the biggest job loss in any calendar year since 1945 are perhaps unnecessarily alarmist. Population growth would naturally mean that both job gains and job losses would be expected to be bigger absolute numbers than they used to be, and there's no special reason to look at calendar years rather than all 12-month intervals. The graph below shows that in percentage terms, the employment decline so far is similar to what we see in a typical recession.

Year-over-year percentage change in seasonally unadjusted nonfarm payroll employment, from FRED.

But my primary concern has not been unemployment per se but instead the dysfunctional financial market that

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Stanford economics professor John Taylor has a new paper in which he takes aim at recent economic policy, and fires with both barrels, concluding that "government actions and interventions caused, prolonged, and worsened the financial crisis."

Taylor begins with an argument he articulated at the 2007 Jackson Hole conference that excessively loose U.S. monetary policy in 2002-2005 was a factor contributing both to the housing boom and subsequent housing bust. The solid line in the figure below shows the actual path that the fed funds rate followed over this period, with the dashed line reflecting what Taylor believes would have been closer to the optimal response.

Source: Taylor (2007).

Taylor's counterfactual simulations suggest that these excessively low interest rates set by the Fed were a key factor causing the unsustainable housing boom, the consequences of whose collapse we are still trying to recover from.

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It looks like it’s time to change the name of our country from the United States of America to the United States of Broke-Town, population 200 million. On November 10, 2008, the Federal Reserve conducted an auction of $150 billion in 17-day credit through its Term Auction Facility. This was a forward auction designed to provide term funding over year-end--the awarded ...

On Thursday, the Federal Reserve issued its weekly H.4.1 report, which provides details of the Fed's balance sheet. Once upon a time, this was one of the least interesting of the government's many releases of data. These days, it's become one of the most exciting.

The essence of the Fed's balance sheet used to be quite simple. The Fed's primary operations would consist of either buying outstanding Treasury securities or issuing loans to banks through its discount window. It paid for these transactions by creating credits in accounts that banks hold with the Federal Reserve, known as reserve deposits. Banks can turn those reserves into green cash any time they desire, so the process is sometimes loosely summarized as saying that the Fed pays for the Treasury bills it buys or loans it extends by "printing money". Before the excitement began, the Fed's assets

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I was astonished when I heard that the Fed is contemplating increasing the Term Auction Facility to $900 billion. I wanted to take another look at the ever-changing balance sheet of the Fed to see how logistically Bernanke might be able to perform such a feat.

The one power that the Fed unquestionably possesses is the ability to create money. It traditionally did so by buying Treasury securities from the public, crediting the sellers' banks with newly created Federal Reserve deposits (a "liability" from the Fed's point of view), and adding the securities purchased to the Fed's asset holdings. Those newly created Federal Reserve deposits are essentially electronic credits that the banks could use to receive delivery of green cash from the Federal Reserve.

The first column of the table below provides a condensed version of the Federal Reserve's balance sheet in the halcyon moments before the credit

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Major indices around the world plunged yesterday (Monday), as the credit crisis picked up momentum in Europe and markets in Asia began bracing for a deep recessionary environment in the West.