More news and talk on the Fed’s new lending tool.
Quoted from http://www.foxbusiness.com/markets/article/feds-new-lending-tool-ease-credit-crunch_405329_2.html:
Will the Fed’s New Lending Tool Help Ease the Credit Crunch?
Wednesday, Dec. 12 2007Analysis
Will the Fed’s New Lending Tool Help Ease the Credit Crunch?
Ken Sweet FOXBusiness
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The Federal Reserve on Wednesday announced a new plan to infuse global markets with money in the latest effort to improve liquidity and minimize damage from the mortgage meltdown.Central banks in Europe and Canada are also participating.
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The Fed said it would conduct two auctions starting next week where banks can bid for up to $40 billion in loans — money that will help them bolster their own reserves. Analysts said it was the Fed’s biggest effort to support stagnant markets since just after the September 11, 2001 terrorist attacks.
“This will smooth some of the funding pressures we have seen since the summer, said Bob Diclemente, Chief U.S. Economist for Citi (C: 31.47, -1.76, -5.29%).
Fed officials are hoping that the extra cash will lead to increased lending by banks and curtail a worldwide credit crunch that has stymied borrowing by businesses and consumers.
The Fed said the move was not in response to the woes of any one bank, but rather an effort to assist all markets. Officials also said the response had nothing to do with the almost 300-point drop in the Dow on Tuesday.
“This had been in the works for awhile,” said a senior Fed official, who spoke to reporters in a background conference call on the condition of anonymity. “The market response was not a factor.”
U.S. investors initially cheered the move, sending markets surging in early trading. But wariness set in later in the day, and markets roamed in and out of positive territory, with the Dow Jones Industrial Average eventually closing up 41.13 at 13,473.90.
Analysts said the plan may not add enough punch to jump-start stalled credit markets, staggered by the subprime mess in the U.S. and the loss of value to securities tied to these loans.
Federal Reserve officials said that this program might overcome the “stigma” that comes with borrowing from the discount window – which is when banks borrow directly from the Fed instead of borrowing from themselves. The discount window is often viewed as a “lender of last resort.”
“The discount window currently doesn’t perform its function,” Diclemente said. “This auction process goes after the same collateral that would normally be used in the discount window, but in a more efficient manner.
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