[Marxism] Fed IS footing bill for lenders' crisis (that is, they will make us pay for it)

["Fred Feldman" <ffeldman@xxxxxxxxxxxxxxxx>]

December 12, 2007
Fed Leads Drive to Strengthen Bank System 
By FLOYD NORRIS and VIKAS BAJAJ
A day after the Federal Reserve disappointed investors with a modest cut in
interest rates, central banks in North America and Europe announced on
Wednesday the most aggressive infusion of capital into the banking system
since the terrorist attacks of September 2001.

Stocks initially surged around the world when the coordinated move was
announced by the central banks, though markets in the United States gave up
nearly all those early gains in afternoon trading. The action is being led
by the Fed, which this month will lend $64 billion itself and through banks
in Europe, and includes the backing of the Bank of Canada, the European
Central Bank, the Bank of England and the Swiss National Bank. 

The injection of new capital into the market suggests that policy makers are
increasingly concerned about the stability of the credit markets, which have
seized up again in the last couple of weeks after they overcame an earlier
bout of panic in August and September. Economists and market specialists say
policy makers are trying to reassure bankers that they will stand firm as
the lender of last resort.

"This is basically a reinsurance policy, it's not an insurance policy," said
William H. Gross, the chief investment officer of Pimco, the bond-management
firm. "They are saying, 'We will stand behind you.' " 

Mr. Gross added: "Now it's up to the private market to gain a little
confidence and turn a little macho and start performing on its own."

Fed officials said the move was an effort to improve financial markets, not
a response to problems at specific banks. "This is not about particular
financial institutions with particular problems," a senior Fed official told
reporters in a background briefing. "It is about market functioning."

Economists and market specialists generally welcomed the Fed's intervention
but expressed some skepticism whether it would be enough to allay the
biggest problems in the credit markets related to problems in the American
housing market, where home prices continue to fall and mortgage securities
are plagued by rising defaults and foreclosures.

"They do not address the underlying imbalances threatening the world economy
- notably the impact the U.S. housing slump will still have via conventional
economic channels," said Julian Jessop, chief international economist at
Capital Economics in London. "But they should at least reduce the risk that
the credit crunch tips economies into recession."

When markets are functioning properly, banks easily and regularly borrow
money from each other at rates that are slightly higher than what, say, the
American government borrows at through Treasury bills. The banks are acting
like homeowners who borrow against the value of their homes, but in the
banks' case they are putting up securities they own as collateral.

But with markets increasingly uncertain about the quality of bank's holdings
- the home loans in their mortgage securities are defaulting at a high rate,
for instance - lending between banks has slowed and become much more
expensive.

The difference between what banks pay to borrow and what the Treasury pays,
for instance, has jumped from less than half a percentage point to more than
2.2 points on Tuesday. By stepping into the breach and lending directly to
banks, policy makers are hoping to tamp that premium back down.

At its meeting Tuesday, the Fed lowered its target for the federal funds
rate, the rate banks normally pay on loans to each other, to 4.25 percent.
And it lowered the discount rate, the rate at which the Fed will lend to
banks on loans secured by virtually any collateral, to 4.75 percent. Share
prices fell after that announcement amid disappointment that a larger cut
was not made. They recovered their losses Wednesday during some wide swings.

The Standard & Poor's 500-stock index, which gained more than 2 percent at
one point in the morning, was down 0.3 percent late in the day and then
ended up 8.94 points, or 0.6 percent, at 1,486.59. The Dow Jones industrial
average climbed nearly 270 points early on, then reversed course and was
down more than 110 points. It finished up 41.13 points, or 0.3 percent, at
13,473.90. 

Fed officials said the announcement had been in the works for some time, but
could not be announced Tuesday because the central banks wanted to make the
announcement when all their markets were open.

"Market reaction yesterday had nothing to do with today's announcement,"
said a senior Fed official. "This was a global effort among a number of
central banks. We wanted to announce that together. We couldn't have
announced that yesterday as Europe was closed" when the Fed announced its
action.

The Fed also said it was making available funds to allow the European
Central Bank to lend $20 billion and the Swiss National Bank to lend $4
billion to European banks that needed to borrow dollars.

The first auction of $20 billion was scheduled for next Monday, followed by
another auction of $20 billion on Dec. 20. The third and fourth auctions
will be on Jan. 14 and 28.

The Fed said that the new auction process should "help promote the efficient
dissemination of liquidity" when other lines of credit were "under stress."

The experience gained from the four scheduled auctions would be "helpful in
assessing the potential usefulness" of this new process to provide funds to
banks in the United States, the central bank said.

Since the global credit crunch hit with force in August, central banks as
well as the Federal Reserve have been injecting large amounts of money into
the banking system in an effort to keep credit flowing. Nonetheless, loans
have been hard for many to obtain.

The auctions held by the Fed will set interest rates on borrowings by banks
from the Fed. The banks will be able to post a wide range of collateral,
including illiquid securities like collateralized debt obligations, as they
now can do at the discount window. But while it often becomes known which
banks borrow at the discount window, the auction procedures are intended to
keep the identities of the borrowers secret.

"There is no reason to believe there would be stigma associated with the use
of this facility," said the senior Fed official.

In Frankfurt, the European Central Bank said it would offer banks in the
13-nation euro area up to $20 billion to help cover their dollar-denominated
liabilities.

"The general objective is to address elevated pressures in the short-term
money market," Lucas D. Papademos, an E.C.B. vice president, told reporters.

He said the bank hoped to reduce the difference between overnight loan rates
and those for three-month and six-month periods, which have remained
stubbornly elevated as banks and other financial institutions have stepped
up their cash hoarding toward the end of the year.

After relaxing somewhat in September and October following great turmoil in
late summer, credit markets have grown tense since mid-November.

Demand for credit often runs higher toward the end of the year, but this
year banks are also building up liquidity cushions to guard against further
losses linked to the deteriorating mortgage market in the United States.

"The most positive aspect is that this is a new response to a problem that
seemed to remain intractable," said Marco Annunziata, the London-based chief
economist for UniCredit. "It will probably not be the silver bullet, but it
should allow us to move forward."

Floyd Norris and Vikas Bajaj reported from New York. Carter Dougherty
contributed reporting from Frankfurt.




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