Financial engineering at the highest level

In a pretty bold move, the Fed opted to expand their off-off balance sheet financing efforts to help hide more mortgage paper choking the system. Another 100 billion goes into the bad loan buyback program. The Fed will exchange treasuries for mortgages. The spin is this will create liquidity specifically in the mortgage market where tight credit conditions are undermining the lending chain without further weakening the dollar. As treasuries are about as close to currency as you can get and are easily convertible to cash, I don't really see how it protects the dollar.

A conglomerate of member banks will try to value the mortgages the Fed will take as collateral -- in effect, Goldman Sachs and others will now be dictating the exchange rate of dollars to mortgages. Considering half of these member banks haven't been able to value these properly on their own books, this doesn't seem like a very sound method. What the Fed is accidentally doing is indirectly tying the dollar to mortgages, which is an extremely dubious and potentially catastrophic move if the mortgage market does not stabilize.

Markets responded by having their best rally since 2003. Go team.