Fed Bailout - Why, How and Will It Cost Me?
Wednesday August 15, 2007
A reader asks:
Why is the FRB pumping money into the big, black hole left by unscrupulous lenders who handed out money to borrowers who would not be able to pay their future debt? AND, most important, whose money is that? Will American tax dollars, once again, bail out others mistakes?Over the past week, the Federal Reserve has pumped $24 billion into the economy to bail out the secondary market. It did so in its role as the central bank to banks, and to restore confidence in the nation's banking system.
The money used was from its portfolio of Treasury Department securities, which it keeps on hand to maintain its own prudent reserves. It is supposed to be a short-term measure to keep the system functioning, not as a bail-out. Ideally, the money will be returned to the Fed once confidence is restored.
Therefore, it should not cost American taxpayers. This sort of thing has happened before: the 1998 LTCM hedge fund crisis, the Y2K panic in 2000, and right after 9/11. (Source: Federal Reserve, Press Release, 8/10/07)
Find out more about how the crisis occurred and how the Federal Reserve intervenes in these types of crises, in The Federal Reserve and the 2007 Banking Liquidity Crisis.
Comments
Howdy, one more ?…how is this different from the S&L scandal in the 80s when our dollars had to bail out that situation in the trillions. Also, Neil Bush was one of the culprits. It seems behind a lot of our problems; there is a Bush.
What percentage of the 2ndary market is Fannie Mae? Is Fannie Mae in trouble, too, or is it just the “high risk” portion of the market? And, like Joanne asks, is this anything like how the S&L crisis started?
Hi Joanne and Kathy,
These are both excellent questions. I will need to do some research to answer them correctly. And, I want to make sure other readers get the answers, too.
Therefore, I will put the answers in blog posts by early next week, at the latest.
Thanks for your comments
Kimberly Amadeo
Would an across-the-board refinance (as mentioned below) be more of a fix than the federal reserve throwing money at the problem? The masses get to keep a roof over their heads and the funds keep Fannie Mae rolling along (MBSs, pension funds, mutual funds included). I really have a burr under my saddle on this situation.
2007-07-22 20:30:10.0
NEW YORK (Reuters) – A number of U.S. states are setting up funds to help homeowners with risky subprime mortgages refinance to more affordable loans in a bid to slow the rate of home foreclosures, The Wall Street Journal reported on its Web site.
The states — which include Maryland, Massachusetts, New Jersey, New York, Ohio and Pennsylvania — are expected to invest a total of more than $500 million in the effort, the newspaper said.
State officials hope this will be enough to keep some vulnerable low and moderate income neighborhoods from sliding into decline.
The Journal said some of the programs will be similar to existing government-lending programs, in which the state extends mortgages to homeowners and then sells those home loans, in some cases to companies such as mortgage and finance giants Fannie Mae (FNM) and Freddie Mac (FRE).
The state then recycles the proceeds from the sales to make additional loans, the newspaper said.
Hello if you are like me who lost a good job and have been struggling to make it, where do you go to get help? My credit is bad due to the loss of a good job and working meaningless ones that paid very poorly. I am a veteran and ther at VA you need a perfect credit score and payment history for help. I checked all places but keep getting the run around, being sent to other places. Please help
Hi Ed,
I suggest you go to the About.com guide for the U.S. Military, Rod Powers. He knows much more about it than I do.
Here is his website
http://usmilitary.about.com/
Kimberly