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Home Front Economy
Fed Auctions Another $50 Billion to Cash-Strapped Banks
2008-04-09
WASHINGTON (AP) -- The Federal Reserve, still working to combat the effects of a severe credit squeeze, said Tuesday it had auctioned another $50 billion to cash-strapped banks. Meanwhile, the International Monetary Fund warned that further actions are needed globally to prevent more wrenching problems.

The Fed auction marked the ninth in a series that so far have pumped $310 billion in short-term loans into the nation's banking system. The Fed has been holding its auctions to supply direct loans to commercial banks every two weeks starting in December. The auctions are only one of a number of emergency procedures the central bank has employed to battle the credit crisis.

Federal Reserve Chairman Ben Bernanke and his colleagues hope that the increased resources being supplied in the Fed auctions will encourage banks to keep lending to consumers and businesses and alleviate the economic drag from a severe credit squeeze that began last August.

In a related move, the European Central Bank, which serves the 15 nations that use the euro as their common currency, announced Tuesday that it had auctioned $15 billion in short-term credit to European banks. It was the sixth auction conducted in tandem with the Fed as the two central banks continue to coordinate their efforts to battle the credit crisis.
Posted by:Steve White

#7  So I guess the secret for me is to figure out how I can also irresponsibly get billions of dollars in debt so the Feds can bail me out?
Honey! grab the plastic! We're goin shopping!!
Posted by: tu3031   2008-04-09 16:01  

#6  "Auction" me a couple of Billion, I've got $500 or so to put up for Collateral.
Posted by: Redneck Jim   2008-04-09 15:02  

#5  When a loan goes bad, the money to repay the lenders comes out the banks capital (or reserves which is capital set aside for this purpose).

Sort of. Wonder why credit card rates remain high decades after the double digit inflation that took off during the Carter years? Particularly since the Fed rate the banks themselves borrow at has been around 5 per cent for nearly a decade. That because the banks have thought nothing of issuing cards to bad or no credit borrowers because they the banks don't take the hit. They simply have everyone else carry the loses. The banks don't pay, the average person pays for the banks improper handling of credit through the high interest rates.

Back before the Carter inflation hit, most states had usury laws with limits on how much interest banks could charge. The rate of inflation quickly out paced those ceiling. So the bank held a proverbial gun at the head of state governments to the effect that unless the ceilings were altered, there would be no lending. The state legislative bodies [many of which were populated by people with local ties to the influential bankers of their districts] simply eliminated the ceilings rather than make the rates adjustable tied to the Fed rate. So what happened when during the Reagan era inflation was brought down to 5 percent or less. Interest rates stayed sky high. So how were the banks operating before the inflation without those sky high rates? For one thing credit cards were hard to get, but they were in business. On the other hand, we weren't expected to bail them out by dumping a half a trillion dollars on the market to cheapen every dollar held by every American.
Posted by: Procopius2k   2008-04-09 08:26  

#4   The problem with banks severely restricting their loans is that many businesses depend on loans to stay in business. No loans, and these businesses will stop operating or go out of existence, even if they are in good operating condition otherwise. This happened repeatedly in the US during the Panics of the 19th century, and was something the Fed was created to prevent.
Posted by: Anguper Hupomosing9418   2008-04-09 07:35  

#3  The Japs have tried this approach for the last 15+ years after the collapse of their property bubble. It hasn't worked all that well for them. I don't think it's going to work all that well for us either, although the alternatives look worse.
Posted by: Pancho Elmeck8414   2008-04-09 04:33  

#2  The real problem is a bank capital squeeze caused by bad loans.

A bank is required to have a capital to loans ratio of around 6% - i.e. they need 6 cents of their own money or every dollar they lend. Most banks have capital ratios around 8% to 10%.

When a loan goes bad, the money to repay the lenders comes out the banks capital (or reserves which is capital set aside for this purpose).

In simple terms, for every 1% of loans that can't be recovered, the banks capital is reduced by 1%.

A bank that starts at 8% capital, only has to have 2% of its loans go bad for it to reach the 6% capital threshold. At which point it is deemed to have insufficient capital for its loans, and must either reduce its loans or raise more capital (sell shares).

As banks reduce lending, the value of assets falls and more loans go bad.

The thinking behind flooding the banks with cheap money is to make them keep lending and hence stop asset prices falling. And hence give banks time to solve the problem.

I'm sceptical but we shall see.
Posted by: phil_b   2008-04-09 02:13  

#1  Including and espec WAMU {Drudge] - Why, Virginai, am I NOT surprised???
Posted by: JosephMendiola   2008-04-09 00:16  

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