RESTORING VELOCITY TO MONEY:

The Fed's Historic Innovation: With a $200 billion plan to ease the credit crunch, a 21st century economy is getting the 21st century monetary policy it requires (Michael Mandel , 3/12/08, Business Week)

Over the past 25 years, Wall Street wizards have moved away from plain-vanilla equity and debt, and constructed a staggering array of derivatives and other new forms of financial instruments. But while these instruments have been highly beneficial for growth, economists and policymakers have repeatedly worried about a major financial crisis triggered by out-of-control derivatives.

The long-feared crisis is now upon us—and the Fed, led by Chairman Ben Bernanke, is responding with a wave of new policy instruments. First came the Term Auction Facility, introduced in December, which allowed the Fed to better pump out money to banks without cutting interest rates. That was good, but it wasn't enough.

The Term Securities Lending Facility (TSLF)—announced Mar. 11—is a more powerful and more precise tool for addressing the dislocations in the credit market. It is aimed at the heart of the current problems: mortgage-backed securities. The problem is that nobody knows what these complicated securities are really worth, so they are clogging up bank balance sheets and impeding the normal flow of credit. Without getting into technical details, the TSLF elegantly sidesteps the problem—the big banks can use these securities as collateral, and borrow Treasuries from the Fed.

The intended result: more lending and borrowing, as nature intended.