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logank1469 | The Federal Reserve pumped $41 billion today , how does this help the credit crisis? |
The Federal Reserve pumped $41 billion into the U.S. financial system Thursday, the largest cash infusion since September 2001, I saw that head line today. Other than the mere fact that banks have more money to loan how doe it help the financial system? doesn't the feds charge a given rate for the money regardless? I just want to understand it. |
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enoriverbend
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The credit crisis is really a liquidity crisis of sorts. More liquidity == one less barrier to credit. As banks have more and easier access to short-term notes, they are more willing to extend credit...although they presumably will still be gun-shy of the worst credit risks. One hopes. |
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adam k
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After the sub prime fiasco, created by irresponsible lenders, lending institutions reigned in their undisciplined lending policies. Loans are harder to get, thereby slowing down the economy. The government money increases the liquidity in the system, making it easier to get loans, thereby giving the economy a kick in the butt.
Also you have to understand that this entire sub prime mess was created because when lenders loan money they sell a type of negotiable IOU called Asset Backed Commercial Paper (ABCP) so they can sell new mortgages.When thousands of insolvent home buyer couldn't meet their monthly payments, due to the teaser Adjustable Rate Mortgage (ARM) the negotiable ABCP suddenly became next to worthless since nobody wanted it as it ceased to have value. So all the people who invested in the ABCP with the hope of reselling them later got stuck.
It's possible that the funds which the government injected will be used to re-emburse the holders of these ABCP to lessen the crises.
Another bail out of irresponsible, greedy, deceitful swindlers? |
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gray shadow
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Let's start with the basic on how the Fed increases/decreases the money supply.
When the Fed wants to increase the supply of money in the economy, they purchase Treasury Securities on the open market (i.e. from public businesses and citizens). The money they use is out of thin air.
Similarly when they want to decrease the supply of money, they sell Treasury Securities from their inventory to the open market. The money they get disappears into thin air.
So when you read that the Fed pumped $41B into the economy, that means they bought $41B in T-Bills on the open market with thin-air money.
Why does this help?
Well, now the previous owners of those T-bills have $41B in cash that they are now looking to invest elsewhere. This will result in more private investment using money that was otherwise idle.
And the interest earned on those T-Bills now owned by the Fed? By law, the Fed has to turn over all income after expenses to the Treasury at the end of the year. So about 90%+ of the interest is returned to the Treasury,. |
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joejostocks
 |
I saw this $41 bil mentioned since Thursday. It is not correct. The Fed had $42.5 bil expiring Nov 1 (thursday) in their Temporary Open Market Operation (TOMO). It is unusual for them to have that much expiring at once because it was almost the complete balance of $47 bil., but it just worked out that way.
They replaced that $42.5 bil with just $41bil. In three repos expiring the 2nd, 8th, and 15th. In essence they drained $1.5 bil. Good site for keeping up with TOMO's.
http://www.gmtfo.com/RepoReader/OMOps.aspx
It appears the media picked it up as a big add when it wasn't. They just replaced what was expiring.
That said, I am not going to say that haven't been adding - just in this case someone got it wrong. Amazing how this story took on a life of its own. Google "Federal Reserve $41 bil". It is all over the place.
Fed TOMO site
http://www.newyorkfed.org/markets/omo/dmm/temp.cfm?SHOWMORE=TRUE
FWIW,
Joe Eifrid
(Joe Stocks) |
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usn63
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It will temporarily help the situation but eventually the dollar will crash further and further. The economy is in real trouble now. Just like giving a shot of adrenaline will bring back a dying accident victim for a few minutes, they eventually expire. This is the situation with the Federal Reserve creating funny money out of thin air and not backing it with anything. There are so many dollars in circulation that each dollar is worth about 1 cent compared to the full dollar's value when the Fed was created in 1913.
My advice, get out of paper and get into non-confiscated gold (commemorative and pre-1933) and silver (commemorative and pre-1965. |
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c v
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Great dialogue everyone.
Does anyone have links to said purchase of collateral? Not news, but governmental (i.e. Fed or participating commercial bank)...
Thanks
cv |
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piet lul
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it does not help at all. |
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