Fed Pumps Another $75 Billion into Financial Markets
This will bring the total to $905 billion that the Federal government has pumped into the financial markets as a result of the Subprime Mortgage Crisis. For a complete rundown of all the Fed interventions, see Federal Reserve and the Banking Liquidity Crisis.
What It Means to You
In all likelihood, the Federal government's actions have avoided a financial meltdown. Although it is possible that the economy is already headed for a recession, it will be less painful than if the government had done nothing.However, if Fannie Mae, Freddie Mac, the Fed and the Federal Home Loan Banks get stuck with the $905 billion in bad debt, then this will cost taxpayers almost nine times as much as the Savings and Loan Crisis, which "only" cost the taxpayers $124 billion.
Even if this worst case scenario does occur, the net result is that this debt would get added to the $9 trillion national debt. This would contribute to a chronic situation that has depressed the dollar and raise the price of imports.
For those homeowners that are facing foreclosures, the Fed has a list of resources on its web site at Foreclosure Resources for Consumers.
Comments
Is what the Fed doing not akin quasi-fiscal operations of a central bank?
How does the Fed propose to resolve the situation if the financial institutions that have borrowed failed to repay the loans?
The Fed has guaranteed the loans by holding the assets of the banks it has made the loans to. If the banks default, the Fed will then own the assets outright. If the assets are good, then no problem. If the assets themselves default, then the Fed is out. This money would then eventually come from the taxpayer.
However, that’s a lot of “ifs”. In all likelihood, the banks will repay, the underlying assets won’t default, and all will return to normal functioning by the end of the summer at the latest.
Kimberly