The TAF, liquidity, and partial nationalisation

Interfluidity (IF) points out some suggestive detail in the FED's recent announcement about the TAF. In particular, IF brings up the collapse of distinctions in collateral types in the New York FED statement:

When the Desk arranges its conventional RPs, it accepts propositions from dealers in three collateral “tranches.” In the first tranche, dealers may pledge only Treasury securities. In the second tranche, dealers have the option to pledge federal agency debt in addition to Treasury securities. In the third tranche, dealers have the option to pledge mortgage-backed securities issued or fully guaranteed by federal agencies in addition to federal agency debt or Treasury securities. With the special “single-tranche” RPs announced today, dealers have the option to pledge either mortgage-backed securities issued or fully guaranteed by federal agencies, federal agency debt, or Treasury securities.

This lack of distinction between Treasury securities (known value, known liquidity, pretty much) and MBS (unknown value, problematic liquidity) is very troubling. It is, in James Hamilton's wonderful phrase (via IF) monetary policy using the asset side of the balance sheet.

IF then goes to compare the size of the FED's liquidity injection ($200B) with an estimate of U.S. bank equity ($2T). That is a reasonable comparison. What is less reasonable is the assertion that these positions are equity like, and so represent a 'partial nationalisation' of the U.S. banking system. With equity comes two things: an ownership stake (and hence participation in profits once debt has been paid); and control. Repo, even repo of assets of uncertain value, is neither. In fact the FED has the worst of both worlds right now, at least in terms of these positions. Like an equity holder it is providing funding for an uncertain period - since if it withdraws these auctions some banks will fail - and like the equity holder it has the downside of bank assets proving problematic. But it does not have control, nor does it have equity-like upside. In particular it cannot force the banks to lend. And that is probably what the economy needs most at the moment.