Busted: Bankers and The Global Economy

March 7, 2008

Fed Addresses Bank Liquidity Problems

Filed under: banking, credit, federal reserve, government, money — Tags: , , , , , , — digitaleconomy @ 10:13 am

In an effort to strengthen the U.S. banking system, the Fed has increased the TAF or short-term auction from $30 billion to $50 billion to meet the dramatic demand. The Fed press release also announced the amount would be increased as necessary and that auctions would continue for the next six months unless the need abated. The increase in the TAF auction demonstrates the continued stress in banking finance and the serious condition of the economy.

In more important news, the Fed has started purchasing United States securities today to bolster the economy. Essentially, the Fed is temporarily buying bank-banked securities to increase liquidity within the banking system to loosen the hold of the credit crisis. As a result of the bond holding actions of the Fed, banks can temporarily remove the securities from bank ledgers, bolstering the strength of banking portfolios. Initially, the Fed plans to buy into $100 billion in bank-backed securities and announced that the amount may be increased. Essentially, this tactic amounts to the U.S. government through the Federal Reserve buying the securities to avoid bank failures, thus preventing a loss of confidence. This action will short-circuit the need to for the FDIC to cover a rash of bank failures by bolstering the flagging bank system.

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