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Home Front Economy
Fed Takes Steps to Ease Crisis
2008-03-17
WASHINGTON (AP) -- The Federal Reserve, in an extraordinarily rare weekend move, took bold action Sunday evening to provide cash to financially squeezed Wall Street investment houses, a fresh effort to prevent a spreading credit crisis from sinking the U.S. economy. The central bank approved a cut in its emergency lending rate to financial institutions to 3.25 percent from 3.50 percent, effective immediately, and created a lending facility for big investment banks to secure short-term loans. The new lending facility will be available to big Wall Street firms on Monday.

"These steps will provide financial institutions with greater assurance of access to funds," Federal Reserve Chairman Ben Bernanke told reporters in a brief conference call Sunday evening.

"It seems as if Bernanke & Co. are pulling out all the stops to avoid a serious financial market meltdown," Richard Yamarone, an economist at Argus Research, said Sunday evening.
And that's the point: while we can grouse over people with preserved golden parachutes and the hinky hedge dealings, a meltdown nails all of us.
The new lending facility -- described as a cousin to the Fed's emergency lending "discount window" for banks -- is geared to give major investment houses a source of short-term cash on a regular basis -- if they need it. It will be in place for at least six months and "may be extended as conditions warrant," the Fed said. The interest rate will be 3.25 percent and a range of collateral -- including investment-grade mortgage backed securities -- will be accepted to back the overnight loans.

"This is the Fed as the Yucca Mountain of securitized debt, but it is no doubt necessary," said Terry Connelly, dean of Golden Gate University's Ageno School of Business, referring to the government's underground dump in Nevada for nuclear waste.

Treasury Secretary Henry Paulson said he was pleased by Sunday's developments. "Last Friday, I said that market participants are addressing challenges and I am pleased with recent developments. I appreciate the additional actions taken this evening by the Federal Reserve to enhance the stability, liquidity and orderliness of our markets," he said.

"We appreciate the actions taken by the Federal Reserve this evening," said White House press secretary Dana Perino. "Secretary Paulson and Chairman Bernanke are actively engaged in addressing issues affecting our financial markets. Secretary Paulson has kept the president briefed on recent developments."

The "discount" rate cut announced Sunday applies only to the short-term loans that financial institutions get directly from the Federal Reserve. It doesn't apply to individual borrowers.

The Fed's actions are the latest in a recent string of innovative steps to deal with a worsening credit crisis that has unhinged Wall Street. And, the action comes just two days before the central bank's scheduled meeting on Tuesday, where another big cut to a key interest rate that affects millions of people and businesses is expected to be ordered. That key rate is now at 3 percent and is expected to be cut by at least one-half percentage point on Tuesday. Analysts said the Fed's new steps may lessen pressure for a super-sized cut to that rate.

The Fed said in a statement that the steps are "designed to bolster market liquidity and promote orderly market functioning ... essential for the promotion of economic growth."
Posted by:Steve White

#27  FOX ALL STAR PANEL > FRED BARNES = opined that IHO the US economy is NOT in trouble contrary to news' rhetoric, and that despite HILLARY [Obama's] claim about the alleged "FISCAL IRRESPONSIBILITY OF THE WHITE HOUSE/BUSH WH", RECENT MONETARY TROUBLES ARE DUE MORE TO KNOWINGLY RISKY EXCESSIVE SPENDING BY INDIV MAJOR LENDERS [read - Wall Street], NOT BUSH. BARNES > also opined that "The Fed" [Federal Reserve] exists precisely to intervene in market troubles/crises and to protect same from collapse or severe detriment, thus BARNES > it is NOT irresponsible ala HILLARY for either Dubya or the USG to intervene vv Federal Reserve.

* BARNES > ALLEGED US ECONOMIC TROUBLES > US Job Market had suffered only a slight job loss, INVENTORIES are good or stable, EMPLOYMENT rates are still very good, + WOT/BUDGETARY WAR SPENDING is NOT EXCESSIVE VV US ECONOMY.

BARNES > broadly questioned "WHAT [else] IS CAUSING THESE SO-CALLED MARKET/ECONOMIC TROUBLES" BECAUSE IT ISN'T THE US ECONOMY!?

OTOH, Fred-Mort cohort MARA L > IIRC/IIHC, asked HOW MANY TIMES SHOULD/CAN THE FED [Fed Reserve] INTERVENE OR "DO THIS", e.g. intervene to PROTECT THE BAD/RISKY DECISIONS OF BIG AMERICAN COMPANIES AS OPPOSED TO THE LATTER REAPING WHAT THEY'D KNOWINGLY SOWN AND CORRECTING THEMSELVES AT THEIR OWN COSTS W/O TAX DOLLARS???
Posted by: JosephMendiola   2008-03-17 20:21  

#26  Usually I'm all in favor of avoiding moral hazard.

But there are much bigger things going on here than greed on Wall Street or even greed among consumers.

For 6 years now we've paid most of the cost of the GWOT, not only in the wars but also in security measures at home. And in the meanwhile Europe, which benefits but does not pay, exports heavily and sucks up to China. And the oil ticks engorge themselves even more.

A weak dollar was inevitable in this situation. But it's also a way to bleed off some of the advantage held by the oil ticks and Beijing with their massive holdings in dollars.

NS is right, tho: if Americans had, as a whole, acted more prudently there would be far fewer dicey loans to unwind.

Of course, if Americans had, as a whole, shown more discipline Bush could have reined in the RINOs and Dems who did their damnedest to sabotage everything he attempted over the last 7 years.

The trick is to avoid having the whole damn thing come crashing down. And that will indeed require intervention because this country started mortgaging its core back in the 90s and continued to do so up until this year. Now, while we're hurting, those holding large $$ deposits are dumping them as fast as they think they can without destroying their value entirely.

It's going to be a painful decade or more folks. Even more painful if a) the Dems keep congress & take the white house or b) we let the whole banking system crash.
Posted by: lotp   2008-03-17 19:36  

#25  Financial Triage.

We can't save 'em all.
Posted by: Bright Pebbles   2008-03-17 19:19  

#24  "This is a result of Greenspans low interest rates and abandonment of reserve requirements. It doesn't help that Bernankes theories and thus actions are wrong."

You've nailed how we got here, B.P. The trick is getting out of it.
Posted by: no mo uro   2008-03-17 18:57  

#23  N.S., I read the article, and I would refer you to my comment there.

Good for you on your financial situation. You deserve something better than just a good night's sleep, is all I'm trying to say.
Posted by: no mo uro   2008-03-17 18:55  

#22  "It falls apart because the earned export monies in workers pockets that made the whole shebang work (financial food pyramid) started vaporizing when all the jobs were outsourced. "

Commerce doesn't need to be a pyramid scheme. That's a zero sum approach. What commerce needs is for all components to be realistic about costs, values, and prices, and not try to coerce other parties.

The jobs were outsourced, 3DC, because workers were demanding to be compensated at a rate which was so much greater than what other equally skilled workers in other countries wanted that there was literally no justification for keeping those jobs here. American workers expected someone (government, unions, courts) to protect those incomes and the security they had enjoyed, even if it meant forcing their neighbors to pay way, way more than was necessary for many goods and services. When this reached a critical level, the jobs moved overseas.

If the American worker had realized that his monopoly on the labor market was actually over about 25 years ago and been realistic about wages and living standards (meaning, not expecting them continue, adjusted for inflation, at high levels forever), most of those jobs would never have been outsourced.

Instead, they put on the blinders and told themselves that the income security of immediate postwar America was the historic norm for the workforce (a ridiculous and provably false notion), and that it was perfectly reasonable to think that anyone who had a job could expect it to last until they were 65 or so without having to worry about it, followed by 15 or so years of comfortable retirement. The deals the big three auto manufacturers cut with the unions in the 70's and 80's are a prime example of this head-in-the-sand behavior - we couldn't afford that level of compensation and retirement then, less so now.

That paradigm has been over for a long time now, and it's never coming back, not because of corporate greed (a thing which certainly exists and causes problems, just not this one) or government indifference (ditto), but because of a changed world labor market.

I hope he's wrong, but I suspect SpoD is spot-on correct in his analysis. And this is precisely the approach which hastened the great Depression - not the offshoring of jobs (which wasn't happening then) but the fierce protectionism practiced by the U.S. in order to prop up compensation and job security in a labor market which didn't justify either. Let's not repeat that mistake. Let's tighten our belts, lower our material expectations, and work our way out of this. The jobs will come back, I suspect, when Americans are more honest with themselves about the fact that economies fluctuate and when they have a more sensible notion of living standards than the one they've come to expect for a given amount of work.

And yes, I know this means that I will have to have lower expectations for myself and my family. I won't petition the government to find ways to force my fellow citizens to pay way more than they have to for my work just so I can sleep a little better at night, the way teachers' unions do. Can we not all make the same pledge?
Posted by: no mo uro   2008-03-17 18:51  

#21  Fair, you want fair? From your Federal Government? How old are you? The only place to get fair is from God. And I'm not ready to meet him, yet.

What are the incentives to living frugally, keeping your lifestyle reasonable, getting out of debt, if the end result is that people who sacrificed a great deal less and had a whale of a time all along aren't that much worse off than you?

Getting to sleep at night. No kidding. The only loan I ever had was my mortgage, paid off. Paid for my kids to go to college, what a waste that was. Never got to have a trophy wife, but I'm still waiting for TW to single up.

But I can't say I'd trade places with my bankrupt sister who plans to saddle her kids with debt to go to college while driving a Mercedes, probably hot.

But I can tell you that if we let these banks fail, it will be a lot worse for all of us. Read the Ben Stein post because he explains it a lot better than I could.
Posted by: Nimble Spemble   2008-03-17 18:49  

#20  I believe it's time for financial triage.

Force Banks to open their books, and save those institutions that are possible to save and bury the rest quickly.

The price of being saved should be that the shareholders give up a large %age of equity.

This evaporating "confidence" is a result of much too much LEVERAGED INVESTMENT. This makes predicting the future of investments much more volatile both up and down, bubble and pop.

This is a result of Greenspans low interest rates and abandonment of reserve requirements. It doesn't help that Bernankes theories and thus actions are wrong
Posted by: Bright Pebbles   2008-03-17 18:46  

#19  No mo uro is right. Take moral hazard out of the equation and people are absolutely guaranteed to push the envelope far beyond anything a rational person would consider prudent. I studied the Great Depression pretty seriously in graduate school. The lesson I came away with was that it was all a matter of confidence in the system--when that collapsed, so did the markets.

It's going to take some pretty serious action by both the Fed and other world bankers to contain this mess, and part of that action will be to insure some debts that should never have been incurred in the first place. I don't like that, not at all, but if it's the cost of keeping another Depression away, it's well worth it.
Posted by: Pancho Elmeck8414   2008-03-17 18:32  

#18  N.S., I don't consider myself a tough guy at all. I want what's fair, meaning that not only are there consequences for those who failed, but also that there are benefits for those who did not. (Another "two sides", if you will.)

What are the deterrents to repeated bad financial behavior if the end result is that you aren't all that much worse off than your neighbor who didn't live beyond his means or make foolish mortgage decisions? What are the incentives to living frugally, keeping your lifestyle reasonable, getting out of debt, if the end result is that people who sacrificed a great deal less and had a whale of a time all along aren't that much worse off than you?

I thought this country was about guaranteeing opportunity, not outcomes. At some point, for America to work as America, there have to be severe limits to what the government does in terms of equalizing/mitigating economic outcomes, particularly those related to foolish behavior.

I mean, I hear what you say about a 1931 scenario, I just don't see that we're even remotely close to that, or will be. Right now it's less than 1% of the "average Joe taxpayers" that are in trouble or close on their primary residence, if the stats I've seen are correct.

This isn't about being vindictive towards tricksy bankers or stupid borrowers. If (bankers) broke the law and are convicted of it, and go to jail, or if some tiny fraction of homeowners lose their house, so be it - I'm not slavering at the mouth and cheering over that happening, nor am I particularly averse to those things happening. I'm more interested in solving the problem of getting back to financial sanity than I am in vengeance. But for the government to send the message that there will be no dire consequences to getting so deeply in debt and not paying is a very, very bad thing.

How much liquidity, exactly, should the rest of us inject? And what should its source be?
Posted by: no mo uro   2008-03-17 17:59  

#17  Even the illegals are leaving now.


Cloud-Silver Lining.
Posted by: Redneck Jim   2008-03-17 17:22  

#16  Fed is thinker better inflation than deflation. Still, only solution is for every one of you slackers to get to work and stop spending so much time on the interwebs.
Posted by: Zebulon Angavick7428   2008-03-17 14:10  

#15  One of these days I'll learn to proof read.

Should read "I already owe money more on this house that it's worth, welcome to 3 months ago."
Posted by: Sock Puppet of Doom   2008-03-17 13:02  

#14  These are the primary dealers in government
securities:

BNP Paribas Securities Corp. ("Old Europe" )
Banc of America Securities LLC
Barclays Capital Inc. ("New Europe" )
Bear, Stearns & Co., Inc.
Cantor Fitzgerald & Co.
Citigroup Global Markets Inc.
Countrywide Securities Corporation
Credit Suisse Securities (USA) LLC (Nold Europe)
Daiwa Securities America Inc. (Japanese Europe)
Deutsche Bank Securities Inc. ("Old Europe" )
Dresdner Kleinwort Wasserstein Securities LLC. ("Old Europe" )
Goldman, Sachs & Co.
Greenwich Capital Markets, Inc.
HSBC Securities (USA) Inc. (Chinese Europe)
J. P. Morgan Securities Inc.
Lehman Brothers Inc.
Merrill Lynch Government Securities Inc.
Mizuho Securities USA Inc. (Japanese Europe)
Morgan Stanley & Co. Incorporated
UBS Securities LLC. (Nold Europe)
Posted by: 3dc   2008-03-17 13:02  

#13  #12 was supposed to be a comment on the riots in Tibet. Sorry, I clicked on the wrong comment link.
Posted by: Abu Uluque (aka Ebbang Uluque6305)   2008-03-17 12:37  

#12  The IOC says don't boycott the Olympics. It doesn't say exactly what they mean by boycott but I sure won't be watching.
Posted by: Abu Uluque (aka Ebbang Uluque6305)   2008-03-17 12:35  

#11  The only currencies that seem to be losing value are the Dollar and the Pound. Figure this out for yourself.

The next President and the Democrat congress will go "protectionist" and compound our problems.

Even the illegals are leaving now.

Treasury bonds had no buyers last week, we are broke and in the hole and printing money.

I already owe money on this house that it's worth, welcome to 3 months ago.
Posted by: Sock Puppet of Doom   2008-03-17 12:04  

#10  It falls apart because the earned export monies in workers pockets that made the whole shebang work (financial food pyramid) started vaporizing when all the jobs were outsourced.
Posted by: 3dc   2008-03-17 11:49  

#9  Re-reading my first paragraph, I believe we are in violent agreement.
Posted by: Nimble Spemble   2008-03-17 10:21  

#8  On the other hand NS, with the Fed dumping an astronomical level of dollars into the market we can also end up with Weimar money too. Where we all have to go plastic because the government can't print enough dollars to haul to the store to buy even basic commodities.
Posted by: Procopius2k   2008-03-17 10:03  

#7  For the first time ever, inflation linked bonds are trading at a negative interest rate.

Anyone else remember stagflation.
Posted by: phil_b   2008-03-17 10:01  

#6  I agree that the Fed should not be lowering rates as it is, but should be providing liquidity to keep financial institutions functioning. However, there are two sides to every balance sheet.

It would be interesting to hear what all you tough guys have to say when you've lost your job, your 401(k) is worthless and your bank won't clear your checks. Because that is where this ends, for every average Joe Taxpayer if the banks really start to go under. You may not like that some people make out better in the rescue than others or that those you think are culpable don't go to jail, but that's the way deals go down. The alternative is 1931 redux. And don't think it can't happen.
Posted by: Nimble Spemble   2008-03-17 09:39  

#5  The central bank approved a cut in its emergency lending rate to financial institutions to 3.25 percent from 3.50 percent, effective immediately, and created a lending facility for big investment banks to secure short-term loans

Of course allowing all those 'creative mortgages' to be refinanced at 3.25, or even 3.50, percent is unthinkable. [Rhetorical Question] Why do the Big Houses (Banks) get the sweetheart loans, but the average Joe Taxpayer get to carry all the overhead and profit of the institutions? Where would we be today in the financial market if all those 'risky loans' were absorbed by a federal instrument at the get-go at the lower rates? Certainly billions of fewer dollars inflating the market and cheapening the dollar on commodities.
Posted by: Procopius2k   2008-03-17 09:28  

#4  This is a good article about why the crisis occured.

And I'd add that the reason banks were willing to lend approaching 100% on real estate was because of the steady appreciation of real estate. When real estate started to appreciate much faster than inflation the same lending practices prevailed, resulting in the bubble and the current train wreck.

BTW, in the Great Depression real estate fell because of deflation, but the effect was the same. The value of real estate fell below the amount of the loan and people walked away from their property and stuck the bank with the bad debt.

This is a problem in a lot of countries.
Posted by: phil_b   2008-03-17 08:54  

#3  The solution is for the fed to do the right thing and raise the interest rate to what it actually should be (8-9% right now) to reflect the actual cost of borrowing money, and allow the chips to fall where they may (I like Bright Pebbles line of reasoning). It won't happen until after the election, and that's too bad, because every minute we delay in applying the right solution will harm us down the road. But it's the only thing that will restore some honesty to our economy and the value of the dollar, no matter how painful the immediate consequences might be.

I can't understand the joy of individuals (who ought to be smarter) at keeping the interest rates as low as they've been the last eight or ten years. All this is doing is keeping bubbles puffed up and masking real-world inflation caused by other externalities.

Look for interest rates to start rising after this election cycle and be at 12-14% by 2010. There'll be nothing any politician can do to prevent that from happening, and if they somehow do find a way to keep rates at these artificially low levels, confidence in the dollar will tank completely.
Posted by: no mo uro   2008-03-17 07:33  

#2  This step is quite important to ensure that nobody loses their third or fourth vacation home. It's also important that the causes behind it are never investigated and nobody ever goes to jail for it.
Posted by: gromky   2008-03-17 07:17  

#1  The Fed should DEMAND EQUITY in return for loans.

It's time to end the bailouts, and demand something for the bailers (you and I).
Posted by: Bright Pebbles   2008-03-17 07:10  

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