Sept. 29 (Bloomberg) -- The Federal Reserve will pump an additional $630 billion into the global financial system, flooding banks with cash to alleviate the worst banking crisis since the Great Depression.
The Fed increased its existing currency swaps with foreign central banks by $330 billion to $620 billion to make more dollars available worldwide. The Term Auction Facility, the Fed's emergency loan program, will expand by $300 billion to $450 billion. The European Central Bank, the Bank of England and the Bank of Japan are among the participating authorities.
The Fed's expansion of liquidity, the biggest since credit markets seized up last year, came hours before the U.S. House of Representatives rejected a $700 billion bailout for the financial industry. The crisis is reverberating through the global economy, causing stocks to plunge and forcing European governments to rescue four banks over the past two days alone.
``Today's blast of term liquidity will settle the funding markets down, and allow trust to slowly be restored between borrowers and lenders,'' said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. On the other hand, ``the Fed's balance sheet is about to explode.''
The MSCI World Index of stocks in 23 developed markets sank 6 percent, the most since its creation in 1970. Credit markets deteriorated further as authorities tried to save more financial institutions from collapse.
European Rescue
European governments have rescued four banks in two days and the Federal Deposit Insurance Corp. said today it helped Citigroup Inc. buy the banking operations of Wachovia Corp. after its shares collapsed. The Standard & Poor's 500 Index fell 3.8 percent and the cost of borrowing dollars for three months rose to the highest since January. The rate for euros hit a record.
``If people think the authorities may give in to fears, they are wrong,'' Financial Stability Forum Chairman Mario Draghi said today in Amsterdam, where the international group of regulators and finance officials is meeting. ``There is willingness and determination on winning the battle to restore confidence and stability.''
Banks and brokers have slowed lending as they struggle to restore their capital after $586 billion in credit losses and writedowns since the mortgage crisis began a year ago. The bankruptcy of Lehman Brothers Holdings Inc. also sparked fears among banks they wouldn't be repaid by counterparties, driving up the cost of short-term loans between banks.
Funding Risk
``By committing to provide a very large quantity of term funding, the Federal Reserve actions should reassure financial market participants that financing will be available against good collateral, lessening concerns about funding and rollover risk,'' the central bank said.
The Bank of England and the ECB will each double the size of their dollar swap facilities with the Fed to as much as $80 billion and $240 billion, respectively. The Swiss National Bank and the Bank of Japan will also double their dollar swap lines, while the central banks in Australia, Norway, Sweden, Denmark and Canada tripled theirs.
All the banks extended their facilities until the end of April 2009.
The Fed is also increasing the size of its three 84-day TAF sales to $75 billion apiece, from $25 billion. That means the Fed will make a total of $225 billion available in 84-day loans. The central bank will keep the sales of 28-day credit at $75 billion.
Special Sales
In addition, the Fed will hold two special TAF sales in November totaling $150 billion so banks can have funding available for one or two weeks over year-end. The exact timing and terms will be determined later, the Fed said. The TAF program began in December, totaling $40 billion.
The bank-rescue plan being debated by Congress today would give the Fed more power over short-term interest rates by providing authority as of Oct. 1 to pay interest on reserves held at the central bank by financial institutions. That would make it easier for the Fed to pump funds into the banking system.
Paying interest on reserves puts a ``floor'' under the traded overnight rate, which would allow a central bank ``to provide liquidity during times of stress'' without affecting the rate, New York Fed economists said in a paper last month.
pump it up...print more money..WOO! Party like it's 1999
pkcRAISTLIN
those evil fabian socialists!
Krypton
quote:
Originally posted by Capitalizt
pump it up...print more money..WOO! Party like it's 1999
Well, the Fed is charged with the stability of the financial system, so wouldn't you expect them to do such an action? The system obviously needs liquidity to function. What we need is regulations which will prevent this from ever happening again...Saying we should give the market complete and total freedom from government is like calling for anarchy. No traffic laws, no civil codes, no criminal code. Society can govern itself right?
pkcRAISTLIN
yeah, for some reason capitalizt thinks its a great idea for the entire world to suffer rather than re-think his antiquated libertarian beliefs.
i dont think anyone (and sure as hell not capitalizt) knows exactly how bad things would get without a bailout, but its interesting to see the henny penny's want to find out.
someone like capitalizt that doesn't think a plane hit the pentagon, why do you think he'd have a valid understanding of this, a far more complex issue? :conf:
Capitalizt
lulz, who said give the market "complete and total freedom from government"?
You won't find any libertarian arguing for that no matter how wacked out they are. There should always be forces in place to prevent fraud, theft, and violence. And what has occured on wall street would certainly qualify as fraud IMO.
There are shades of gray out there krypton. Nobody is arguing for anarchy. We don't need an all or nothing approach to government, but the sheer scale of these interventions and bailouts take us much too far down the road to socialism for my tastes.
Things need to correct once in a while. It's like cutting the cancer out of your body.. It's a very painful and unpleasant experience that can last several years..but it is a necessary step if you want to live a full and happy life.
I posted this in the other thread and I'll post it again. This is one of the few people talking sense on the issue:
quote:
Commentary: Bankruptcy, not bailout, is the right answer
CAMBRIDGE, Massachusetts (CNN) -- Congress has balked at the Bush administration's proposed $700 billion bailout of Wall Street. Under this plan, the Treasury would have bought the "troubled assets" of financial institutions in an attempt to avoid economic meltdown.
This bailout was a terrible idea. Here's why.
The current mess would never have occurred in the absence of ill-conceived federal policies. The federal government chartered Fannie Mae in 1938 and Freddie Mac in 1970; these two mortgage lending institutions are at the center of the crisis. The government implicitly promised these institutions that it would make good on their debts, so Fannie and Freddie took on huge amounts of excessive risk.
Worse, beginning in 1977 and even more in the 1990s and the early part of this century, Congress pushed mortgage lenders and Fannie/Freddie to expand subprime lending. The industry was happy to oblige, given the implicit promise of federal backing, and subprime lending soared.
This subprime lending was more than a minor relaxation of existing credit guidelines. This lending was a wholesale abandonment of reasonable lending practices in which borrowers with poor credit characteristics got mortgages they were ill-equipped to handle.
Once housing prices declined and economic conditions worsened, defaults and delinquencies soared, leaving the industry holding large amounts of severely depreciated mortgage assets.
The fact that government bears such a huge responsibility for the current mess means any response should eliminate the conditions that created this situation in the first place, not attempt to fix bad government with more government.
The obvious alternative to a bailout is letting troubled financial institutions declare bankruptcy. Bankruptcy means that shareholders typically get wiped out and the creditors own the company.
Bankruptcy does not mean the company disappears; it is just owned by someone new (as has occurred with several airlines). Bankruptcy punishes those who took excessive risks while preserving those aspects of a businesses that remain profitable.
In contrast, a bailout transfers enormous wealth from taxpayers to those who knowingly engaged in risky subprime lending. Thus, the bailout encourages companies to take large, imprudent risks and count on getting bailed out by government. This "moral hazard" generates enormous distortions in an economy's allocation of its financial resources.
Thoughtful advocates of the bailout might concede this perspective, but they argue that a bailout is necessary to prevent economic collapse. According to this view, lenders are not making loans, even for worthy projects, because they cannot get capital. This view has a grain of truth; if the bailout does not occur, more bankruptcies are possible and credit conditions may worsen for a time.
Talk of Armageddon, however, is ridiculous scare-mongering. If financial institutions cannot make productive loans, a profit opportunity exists for someone else. This might not happen instantly, but it will happen.
Further, the current credit freeze is likely due to Wall Street's hope of a bailout; bankers will not sell their lousy assets for 20 cents on the dollar if the government might pay 30, 50, or 80 cents.
The costs of the bailout, moreover, are almost certainly being understated. The administration's claim is that many mortgage assets are merely illiquid, not truly worthless, implying taxpayers will recoup much of their $700 billion.
If these assets are worth something, however, private parties should want to buy them, and they would do so if the owners would accept fair market value. Far more likely is that current owners have brushed under the rug how little their assets are worth.
The bailout has more problems. The final legislation will probably include numerous side conditions and special dealings that reward Washington lobbyists and their clients.
Anticipation of the bailout will engender strategic behavior by Wall Street institutions as they shuffle their assets and position their balance sheets to maximize their take. The bailout will open the door to further federal meddling in financial markets.
So what should the government do? Eliminate those policies that generated the current mess. This means, at a general level, abandoning the goal of home ownership independent of ability to pay. This means, in particular, getting rid of Fannie Mae and Freddie Mac, along with policies like the Community Reinvestment Act that pressure banks into subprime lending.
The right view of the financial mess is that an enormous fraction of subprime lending should never have occurred in the first place. Someone has to pay for that. That someone should not be, and does not need to be, the U.S. taxpayer.
Originally posted by Capitalizt
lulz, who said give the market "complete and total freedom from government"?
You won't find any libertarian arguing for that no matter how wacked out they are. There should always be forces in place to prevent fraud, theft, and violence. And what has occured on wall street would certainly qualify as fraud IMO.
There are shades of gray out there krypton. Nobody is arguing for anarchy. We don't need an all or nothing approach to government, but the sheer scale of these interventions and bailouts take us much too far down the road to socialism for my tastes.
Things need to correct once in a while. It's like cutting the cancer out of your body.. It's a very painful and unpleasant experience that can last several years..but it is a necessary step if you want to live a full and happy life.
I posted this in the other thread and I'll post it again. This is one of the few people talking sense on the issue:
I don't think Freddie Mac, Fannie Mae, and AIG could have been allowed to go insolvent without a total meltdown of the broader economy. INDIVIDUALLY, these companies had TRILLIONS of dollars worth of assets on their balance sheet. Mortgages, annuities, college loans, car loans, etc. etc. etc, AND with global reach in over several dozen countries. The Fed's job is to maintain a stable financial system, and that is what they're desperately trying to do.
As for the $700 billion bailout. If tax payers don't own the companies outright up to the amount of the bailout, then NO BAIL OUT, DAMMIT!!
jerZ07002
quote:
Originally posted by Krypton
I don't think Freddie Mac, Fannie Mae, and AIG could have been allowed to go insolvent without a total meltdown of the broader economy. INDIVIDUALLY, these companies had TRILLIONS of dollars worth of assets on their balance sheet. Mortgages, annuities, college loans, car loans, etc. etc. etc, AND with global reach in over several dozen countries. The Fed's job is to maintain a stable financial system, and that is what they're desperately trying to do.
As for the $700 billion bailout. If tax payers don't own the companies outright up to the amount of the bailout, then NO BAIL OUT, DAMMIT!!
I am thoroughly impressed my friend. Such an about face since your previous discussions about the fed. Nice to see someone using a discussion board for self improvement.
Krypton
quote:
Originally posted by jerZ07002
I am thoroughly impressed my friend. Such an about face since your previous discussions about the fed. Nice to see someone using a discussion board for self improvement.
Better here than make an ass of myself in person..:clown:
josh4
quote:
Originally posted by Krypton
Better here than make an ass of myself in person..:clown:
