So why is the Fed taking actual steps on behalf of liquidity?

[JackRiddler]

I thought Congress authorizing the purchase of $700 billion in junk derivatives (plus $130 bn in "sweeteners" for the House votes) solved this problem.

Fed to boost auctions, pay interest on reserves
Mon Oct 6, 2008 9:31am EDT

Treasury's Ryan: credit markets a primary focus: CNBC
9:31am EDT

WASHINGTON (Reuters) - The Federal Reserve on Monday announced a series of steps to funnel massive amounts of liquidity through clogged credit markets, including boosting the sizes of cash auctions and offering banks interest on reserves.

"The Federal Reserve is substantially increasing the size of the Term Auction Facility (TAF) auctions," the central bank said in a statement. Specifically, the Fed will boost its 28-day and 84-day TAF auctions to $150 billion each. The Fed will also begin paying interest on reserves held by the central bank with required reserves receiving a larger payment than excess balances.

Required reserves will be paid interest at a rate of 0.10 percentage point below the federal funds rate. Excess balances held by the Federal Reserve will be paid 0.75 percentage point below the funds rate - although the Fed said that it might yet tinker with that formula.

"Together, these actions should encourage term lending across a range of financial markets in a manner that eases pressures and promotes the ability of firms and households to obtain credit," the Fed said in a statement.

(Reporting by Mark Felsenthal, Editing by Chizu Nomiyama)

[stray cat]

1. No easy fix - just trying to prevent a complete melt down

Kind of treating someone in cardiac arrest - lots of things attempted rapidly because once there dead nothing will work

[JackRiddler]

2. Yeah, well, except the "bailout"

was kind of like leaving the crashcart to get on the phone and sell off the dying guy's assets in the hope that will revive him.

[Newshues]

3. the bailout was to solve an illiquidity problem

rather than a liquidity problem. Thinking of illiquidity and liquidity as opposites in the current crisis isn't accurate. I know, I know, the words mean the opposite but this is english - context helps to define the meaning of words and can greatly alter them.

The problem the bailout is designed to solve is insolvency because of illiquidity or under capitalization in otherwise healthy companies. Doing so would help to restore trust and confidence between institutions and help with the liquidity problem.

The FED, not the Treasury, handles the liquidity problem. In essence, the FED is dumping cash into the credit markets at a breakneck speed in order to keep the system going long enough for trust and confidence to return to the credit markets.

Look for the FED to announce that is going to cover overnight lending between financial institutions much as the FDIC covers deposits for depositors.

This is a crisis of trust and confidence and when the House failed to pass the bailout last Monday investors lost trust and confidence that there was any political leadership on the crisis that had a clue as to what it was doing or how grave the situation is.

This is only the beginning.