Fed Bailout Tops $1.2 Trillion -- Is It Working?

In June, the Federal Reserve will lend more $225 billion through its Term Auction Facility. The TAF will auction off $75 billion worth of 28-day loans on each of three days: June 2, June16 and June 30. The loans are auctioned so that banks themselves set the interest rate for the loans, not the Fed. Through the auction, banks can avoid using the Fed's discount window, which could be seen by the banking community as a sign that they have a lot of subprime mortgage debt on their books. (Source: Federal Reserve Press Release, May 29, 2008)

This will bring the total to $1.2 trillion 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, the Fed is warning that the financial markets seem to be becoming dependent on the Fed for short-term lending, and that they need to resume lending to each other. As I have said before, the problem is not one of liquidity, but of trust. Banks are not willing to lend to each other because none of them want to get stuck with bad sub-prime mortgage debt.

However, if Fannie Mae, Freddie Mac, the Fed and the Federal Home Loan Banks get stuck with the $1.2 trillion in bad debt, then this will cost taxpayers more than ten 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.

Related Articles

• Fannie Mae, Freddie Mac and the Subprime Mortgage Crisis
• Secondary Mortgage Market
• Subprime Mortgage Crisis Looking Even MORE Like the Savings and Loan Crisis