Fed Pumps Up Banking System to Treat Credit Crunch

The Federal Reserve announced an agreement Wednesday with four foreign central banks to inject billions of dollars into the world’s financial system to make more money available for big banks to lend to smaller ones.

The Fed said it would lend at least $40 billion to cash-strapped U.S. banks starting next week, and make $24 billion available to the European Central Bank and the Swiss National Bank to alleviate demand for dollars in Europe. It also has agreed to make dollars available to the Canadian and British central banks.

The move is seen as an innovative approach to ending the credit crunch and warding off recession than just lowering the benchmark interest rate.

“This Fed has surprised people with its ability to think outside the box,” says Jay H. Bryson, global economist for Wachovia Corp. “It’s trying to take a more targeted approach to financial problems, instead of the sledgehammer of cutting the benchmark federal funds rate.

By themselves, the Fed actions will not reverse slumping home prices or erase trouble with mortgage-backed securities that have fallen out of favor with investors because of the subprime home loan crisis. But analysts say that the concerted effort by the central banks would help the global financial system buy time to fix the problems on its own.

Source Los Angeles Times, Peter G. Gosselin
By REALTOR® Magazine Online