Today, the Fed announced yet another move to try and unfreeze the credit markets. They have announced that they will start buying Commercial Paper.
While I'm not a huge fan of the Fed coming in and doing things like this, I much prefer this strategy over the strategy of throwing good taxpayer money at bad assets. I even talked about this exact strategy in my post about what the government should consider doing. Why do I prefer this plan? Unlike the bailout, this plan attempts to get to the root of the problem. The problem isn't with these mortgages going bad. The problems we are facing now is that people are not able to find other parties which will extend credit.
The commercial paper market's purpose is exactly this; it is a market created for business and government to obtain short-term debt. This is vitally important for some businesses and governments because their cash flow is not sufficient to run their day to day operations. This is the essence of the credit crunch going on right now. The bad mortgages on the books of the banks is just one of the causes but it is not the problem that needs to be addressed. If we really want to unstick the credit markets, this is the right approach. The fed now truly becomes the lender of last resort, a role it has always historically had. So long as this plan has a limited time frame, and it does, then this will have the desired effect of providing liquidity in the markets and calming the panic that is now going on.
This won't fix all the issues, so let's not start popping the champagne. But this is a much better step than anything that preceded it. However, me being the skeptic I am, I am sure that the Fed wills somehow screw this up. In all likelihood they will do this by dropping the fed funds rate. They will of course have gotten amnesia and forgotten that the reason we got into this problem was that money was WAY too cheap for too long.
So how the heck did the Fed come to its senses? Are they reading my blog? Are they going to screw it up again?