Now the Fed is loaning on “commercial paper” for the first time in history and extending credit to nearly one trillion dollars. What is next to expand the economic lifeline?
global bailout crisis
Countries scrambled to slow the growing global financial crisis today. The Federal Reserve was close behind the heels of a bad day at the stock market with a few arrows in its quiver early this morning to counter the mess that has evolved from frenzied mortgage lending and trading in unregulated financial derivatives.
The Financial Services Regulatory Relief Act of 2006 originally authorized the Federal Reserve to begin paying interest on balances held by or on behalf of depository institutions beginning October 1, 2011. The recently enacted Emergency Economic Stabilization Act of 2008 accelerated the effective date to October 1, 2008.
The economic lifeline credit for banking has been extended by the Federal Reserve and will reach nearly $1 trillion dollars by the end of the year.
“The sizes of both 28-day and 84-day Term Auction Facility (TAF) auctions will be boosted to $150 billion each, effective with the 84-day auction to be conducted Monday. These increases will eventually bring the amounts outstanding under the regular TAF program to $600 billion. In addition, the sizes of the two forward TAF auctions to be conducted in November to extend credit over year end have been increased to $150 billion each, so that $900 billion of TAF credit will potentially be outstanding over year end.”
The Federal Reserve Board on Tuesday announced the creation of the Commercial Paper Funding Facility (CPFF), a facility that will complement the Federal Reserve’s existing credit facilities to help provide liquidity to term funding markets. The U.S. Federal Reserve has focused on calming chaotic markets by creating a new commercial paper facility that buys “short-term highly rated debt,” funding corporate borrowing for the first time in history.
Today Ben Bernanke admitted that institutions including Washington Mutual and Wachovia had experienced banking runs by depositors, creating a crunch on funding. Because of the size of Wachovia and to prevent destabilization, the Federal Reserve is working to have other institutions absorb the assets of that bank without closing it down.
Bernanke also admitted that inflation has been elevated, reflected by the steep increases in the price of oil this year as well as other commodities, imports and higher costs of production. Until now, the Fed has been reluctant to publicly admit such a fact. However, more recently, the prices of oil and other commodities, while remaining quite volatile, have fallen from their peaks, and prices of imports show signs of decelerating. The recently falling price is due to inflation in the rest of the world lining up with the United States, although Uncle Ben didn’t specify that reality.
Uncle Ben is ever the public optimist:
“The steps being taken now to restore confidence in our institutions and markets will go far to resolving the current dislocations in the markets. I believe that the bold actions taken by the Congress, the Treasury, the Federal Reserve, and other agencies, together with the natural recuperative powers of the financial markets, will lay the groundwork for financial and economic recovery.”
Meanwhile, the pillars of high finance are giving way. The International Monetary Fund increased an estimate of global losses from the financial crisis, warning that the world’s economic downturn is quickly evolving into a global depression. Iceland, Russia and Australia are high on the list of countries working at a frantic pace to protect their banking and monetary systems.