So, the Fed is in the Mortgage Business?

Steve Barr:

Apparently, Britney has some shaky assets on her balance sheets. Well, don’t worry Britney. You’re not the only one.
In an announcement that has sent produced a large and varied reaction, the FED has announced that they will attempt to bail out banks by letting them use mortgage-backed securities as collateral for loans. This move is unprecedented in the Fed’s history. For the first time, they are entering the mortgage business. Since its inception, the Fed has used open market operations (the buying and selling of treasury bonds) to expand or contract the monetary policy. A good detailed discussion is here, at interfluidity. Simplistically, the Fed’s balance sheet looks like:

A Bailout, for Everyone by Steven Pearlstein:

Last week, it was a $200 billion cash-for-bond swap for the banks.
This week, it was a $200 billion bond-for-bond swap for the big investment houses.
If they keep this up, pretty soon you’ll be able to walk into any Federal Reserve bank and hock that diamond brooch you inherited from Aunt Mildred.
Forget all that nonsense about the Bernanke Fed being too timid or behind the curve. In the face of what is turning into the most serious financial market crisis since the Great Depression, the Fed has been more aggressive and more creative in using its limitless balance sheet — in effect, its ability to print money — than at any time in history.
We can argue till the cows come home about whether this is a bailout for Wall Street. It is — but only to the extent that it is also a bailout for all of us, meant to prevent a financial and economic meltdown that drags everyone down with it. In broad strokes, we’re going through a massive “de-leveraging” of the economy, wringing out trillions of dollars of debt that had artificially driven up the price of real estate and financial assets, and, more generally, allowed Americans to live beyond their means. The Fed’s goal has not been to impede that process, simply to make sure that it proceeds in an orderly fashion. But even that has required central bank intervention that is unprecedented in scale and scope. And despite yesterday’s huge rally in the stock market, Fed officials warn that this de-leveraging is nowhere near finished.