We would expect the Treasury to start ramping up the size of auctions over the next several weeks to fund the program—with an initial target of perhaps $100–200 billion in the program account by mid-November, but the agency is not expected to staffed and up and running for perhaps four to six weeks. Actual purchases of securities are not likely until perhaps the second half of November.

But mortgage-backed securities prices should rise immediately in secondary markets in anticipation of these purchases, which should provide some relief for severely stressed capital positions in the banking system fairly quickly. We expect the banking system to receive another shot in the arm from the Federal Reserve—the FOMC is expected to reduce interest rates by 50 basis points before the end of October.

These combined measures should alleviate some of the stress that has building up in the U.S. financial markets over the past several weeks. It would be naïve, however, to assume that these measures alone will be a panacea for the economy. The economy is in the midst of a recession, and the passage of the TARP legislation, in conjunction with anticipated rate cuts from the Federal Reserve, will only provide some scaffolding under the financial markets over the next few months to prevent a more serious meltdown. We do not expect to feel a palpable improvement in general credit conditions until perhaps the end of 2008 or early 2009.

Nevertheless, these latest policy developments could represent the first glimmer of hope that there may be some light at the end of the long tunnel for the banking system and the U.S. economy.