We’ve discussed many times how Feds are firing bullets and how many bullets are left. Today the good cowboy Bernanke decided to keep the bullets and to throw a knife into the bad cowboy (credit crunch).
By my understanding there is no new money injected into the system. What they do is that they take bad securities as collateral (yes, moral hazard) and give treasuries in exchange. As the amount of bad securities in the system declines the velocity of money will increase and some markets will be unfrozen.
In sum I think Feds did a good job, this certainly will help short-term. But the bad debt did not disappear, it is just swept under the carpet for now. The best analysis of the situation is here, in perfect Lee Adler piece.
I will wait till the end of the day and unwind half of my short position. I lost money today, but only a fraction (like 20%) of what I made in the last two weeks, on this downside move. I think I want to preserve my profits now