The Federal Reserve will grant $700 billion of cash loans to banks that are pressed for money in order to temporarily fix the credit crunch and renew spending in our economy.
The current lack of bank-to-bank lending is a main reason why the U.S. economy is failing since borrowers cannot take out loans or pay their employees.
"The lending is called the Troubled Asset Relief Program and they have $700 billion that they can utilize for this," David J. Huber, president of Huber Financial Group Ltd., said. "Basically, the Department of Treasury is buying these troubled assets for cash." Huber said.
In the market now, the mobility of banks to invest and use their money creates substantial risks to their wellbeing. Wall Street took a turn for the worst when Dow Jones Industrial plummeted by 500 points last Monday.
"[Tuesday] it was down over 600, and should reach around 1500 for the week," Huber said. "There's not a lot of liquidity and everyone is cashed squeezed, so the cash bailout will inject more funds into the banking system."
"Businesses and individuals will find relief."
However, the crisis does not only pertain to the flow of money between investments and companies.
"It is a liquidity crisis There's not enough liquid money in the system and a lot of companies are being bogged down by foreclosures and bad debt," Huber said. "This is intended to free up the economy and get it moving in the right direction.
"The Federal Reserve expects that the 700 billion will take awhile to kick in. "Results might take about a month or so," he added. "It is meant to provide stability for the economy."
The process of buying these bad mutual funds and removing the debt is called the Emergency Economic Stabilization Act of 2008.
Although some people believe that the government's bailout for banks is not necessary, financial professionals insist that it is.
"It was necessary and it was not just popular, the government had to do it," Huber said. "Essentially, the entire economy could collapse. It's a global problem. The stock market is down almost 40 percent for the year, and the negativity hits almost everyone."
"Banks don't want to lend money to people that can't pay it back, and this bailout is designed for the government to come in and purchase these impaired assets," Scott Murphy, a certified public accountant, said.
Simply put, the bad assets make companies look bad.
"The buyout makes the financial institutions more solvent, and they look more attractive to banks when they wish to borrow money," Murphy said.