WASHINGTON, Oct. 7, 2008
Fed Takes Radical Step To Unthaw Credit
Will Buy Unsecured Short-Term Debts So Large Companies Can Resume Borrowing
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(AP)
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Financial Meltdown
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Credit Crunch
Feeling the squeeze? Here's a look at actions and statements from key players in Washington.
The Federal Reserve will buy "commercial paper," a short-term financing mechanism that many companies rely on to finance their day-to-day operations, such as purchasing supplies or making payrolls.
The $99.4 billion daily market for this crucial financing, which relies on investors rather than banks, has virtually dried up. That has made it increasingly difficult and expensive for companies to raise money to fund their operations. Commercial paper is a way of borrowing money for short periods, typically ranging from overnight to less than a week.
The unstable situation has left many companies vulnerable. The notion under the plan is for the government to provide a "backstop" that would give companies a new place to get cash, the U.S. central bank, known as the Fed, said. The action makes the Fed a source of credit for nonfinancial businesses in addition to commercial banks and investment firms.
The Fed said it is creating a new entity to buy three-month unsecured and asset-backed commercial paper directly from eligible companies.
"The commercial paper market has been under considerable strain in recent weeks as money market mutual funds and other investors" have become increasingly reluctant to buy commercial paper, especially longer-dated maturities.
The Treasury Department, which worked with the Fed on the program, said the action is "necessary to prevent substantial disruptions to the financial markets and the economy." The Treasury will provide money to the Federal Reserve Bank of New York to support the new program, the Fed said.
If a company's commercial paper is not backed by assets or other forms of security acceptable to the Fed, the company could pay an upfront fee, the central bank said.
The Fed said it hoped its effort would jolt the commercial paper market back to life.
"This facility should encourage investors to once again engage in term lending in the commercial paper market," the Fed said. That should eventually spur financial companies to lend to each other and to their customers, including consumers, the Fed said.
To help ease credit stresses, the Fed announced Monday it will provide as much as $900 billion in cash loans to squeezed banks. It said 28-day and 84-day cash loans being made available to banks will be boosted to $150 billion apiece. Those increases will eventually bring the amounts outstanding under the program to $600 billion.
"I think we're in a very serious situation, that's clear," Julia Coronado, an economist with the investment bank Barclays, told CBS' The Early Show.
Coronado added that while a recession seems imminent, a depression is unlikely. "We have to believe when the U.S. Treasury and the Federal Reserve and central banks around the world are throwing their weight behind this, that is will have some effect," she said.
Loans that will be made available in November to banks also will be increased to $150 billion each. That makes a total of $900 billion in credit potentially outstanding over year-end, the Fed said.
The Fed also said it will begin paying interest on commercial banks' reserves, another way to expand the central bank's resources to battle the credit crisis.
In the $700 billion bailout bill President George W. Bush signed Friday, Congress gave the Fed the power to pay interest on those reserves for the first time. The law accelerated the effective date to Oct. 9 of this year, rather than October 2011.
The move also will encourage banks to keep excess reserves at the central bank because they will now be earning interest on the money. That will help give the Fed more control over interest rates and more leverage to battle the credit debacle. Under the current formula, the Fed would pay interest of roughly 1.25 percent on excess reserves. A different rate would be paid for required reserves.
"Together these actions should encourage term lending across a range of financial markets in a manner that eases pressures and promotes the ability of firms and households to obtain credit," the Fed said.
A growing number of economists and investors believe the Fed will be forced to do an about-face and lower its key interest rate, now at 2 percent, on or before its next meeting on Oct. 28-29.
Such a move would revive the central bank's rate-cutting campaign, which had been halted in June out of concerns that those low rates would worsen inflation. Since then, however, economic and financial conditions have dangerously deteriorated, while inflation pressures have calmed a bit.
Any reduction to the Fed's key rate would cause a corresponding drop in commercial banks' prime lending rate, now at 5 percent. The prime rate is used to peg loans to millions of consumers and businesses.
© MMVIII, CBS Interactive Inc. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed. The Associated Press contributed to this report.
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Couric's Financial Notebook
In case you missed it, that said
THE FED WILL PROVIDE UP TO
NINE
HUNDRED
BILLION
DOLLARS
in short-term debt.
Yes, that''s
NINE
HUNDRED
BILLION
DOLLARS
Didn''t we just write a check for $700 billion which grew to $850 billion just yesterday???
And now they''re coming back for $900 BILLION in fast-lane unsecured untrackable shell games with NINE HUNDRED BILLION DOLLARS
aww SHUCKS let''s just call it an EVEN TRILLION and have it done with.
HOW MUCH WILL THEY WANT TOMORROW - $2 TRILLION? $5 TRILLION???
HOW MUCH OF OUR MONEY WILL BE REAL MONEY ANYMORE and how much will be imaginary money issued on the spot by the Fed in response to an "emergency??"
HEY, GUESS WHAT. The Fed abruptly releasing TRILLIONS OF DOLLARS OF IMAGINARY MONEY in less than a week
THAT *IS* AN EMERGENCY!!!!!!
This is like the day the dam burst. It started with a trickle of only a few tens of billions of dollars in a month. Now it''s A TRILLION DOLLARS A DAY.
THIS *IS* THE DAY THE DAM BURST.
It''s time for a MORATORIUM ON GOVERNMENT INTERVENTION into the disaster that, well, THEY CREATED.
Let all businesses fail. Shut down the economy. Let the fat cats SUCK EGGS.
We ordinary folks were going to go broke anyway.
LET''S LET THE FAT CATS JOIN US IN THE SOUP LINES, instead of us standing there without them.
Posted by xjscave at 08:42 AM : Oct 07, 2008
My dog could have done a better job of regulating the banks.
CBS is just following the trend of mass dereliction of duty.
The economic meltdown has reached critical mass. This is it. Take shelter immediately.
THIS IS NOT A DRILL. THIS IS NOT A JOKE.
THIS IS A GENUINE EMERGENCY
OUR COUNTRY IS OUT OF CONTROL, AND IT IS CRASHING
TAKE COVER, EVERYONE
AND MAY GOD BE WITH US
FOR the CORPORATION, founded on the principle that MONEY and PEOPLE are NOT created equal..
MONEY COMES FIRST!!
Vote Republican! I love being out of work!
Posted by renonv5 at 10:47 AM : Oct 07, 2008
So what do YOU think we SHOULD do?
I''m VOTING AGAINST ALL INCUMBENTS next month. That''s what I''m doing.
I am with you 100%. That is at least a start. It just makes me so sad that the corruption runs so deep and the greed is incomprehensible.
Posted by renonv5 at 10:55 AM : Oct 07, 2008
That spells BABY BOOMER.
60% of Congress is Boomers. Clinton and Bush were both born in 1946 - the kings of the Boomers. Joseph Hazelwood and Bill Gates are Boomers.
THIS IS THE RESULT OF SIXTEEN YEARS OF BABY BOOMERS RUNNING OUR COUNTRY.
No more BOOMERS!
Now the Fed is making the loans directly to businesses instead. But the businesses are insolvent, so that isn''t going to work either.
Soon the Fed will simply start making loans directly to consumers. You will simply sign a contract giving up your freedom, your arm and leg, your first born child, and your eternal soul in exchange for a car loan or a mortgage.
Problem solved!
They should also report in this story that the large companies can also further fund their "GOLDEN PARACHUTES" at the tax payers expense for this federal give a way, corporate welfare plan!
That''s what''s happening !...And America''s middle class is paying for it ! So much for free enterprise.
If our so called "concerned" Government ever really had any intention of helping America, they would be putting financial assistance in the hands of the PEOPLE, who are the real economic engines of the U.S. economy.
The American people buy the goods and services and do most of the work required to run this country. THEY MUST BE PROTECTED AND GIVEN THE TOOLS NEEDED.
So far, the PEOPLE have received NOTHING...Except a
$ 700 Billion dollar bail out debt, and television reports detailing how over 4000 of their children have been killed in a war that was started as a result of a lie.
WMD ? Mission Accomplished ? What''s next ?
Remember, "WE THE PEOPLE" ? Its a novel concept that the U.S. Constitution spoke about a long time ago...
During the last 8 years of this administration, The U.S. Constitution has been basically shreaded into a worthless piece paper that has been discarded.
Wake up America and be sure to vote on Nov 4th !
Its our country....Its time to take our country back and send McSame back to one of his many Arizona Ranches and his side kick, Ms. Barky Failin back to her kennel in Wasilla, AK
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by jensublime2
October 9, 2008 8:50 AM PDT
- ***QUIT blaming the people buying houses they can''t afford.**** Mortgages were EASIER to get than a credit card. Daily I received someting in the mail about refinancing or let my home work for you Just send in you name social and see if you qualify that was the only work i needed to do. CAN you believe a couple of weeks later I had 80,000 eighty thousand dollar loan along with a check for 65,000 that home equity loan cost me 16,000 SIXTEEN THOUSAND DOLLARS: PROFIT for the mortage brokers at 9% to me. THE KICKER...I HAD NO JOB and They did not take the repayment check I sent them sent it back penality for early repayment.... they did not process the double payment automatic withdrawal that I signed up for during the deal....
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Reply to this comment
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See all 26 Commentsso what''s the mortgage crunch all about greed..Greed and more GREED predatory lending with a big payday
They got their money 16K and that my uninformed people was what was and is really happening...
I have kept a file folder of the daily multiple offers i received...