Fed $1.7 Trillion Commercial Loan Program Started Today

The Federal Reserve has become a commercial bank itself today, promising to buy up to $1.7 trillion in short-term debt from businesses if they can't find a bank to lend to them. Interest rates will be from 2-4%, high under normal times but low compared to recent LIBOR rates. The Fed will buy high-quality, three-month debt to dozens of companies that signed up last week, including Morgan Stanley, the finance arm of General Electric, Ford Motor Credit and GMAC LLC.

The Fed announced the program on October 7, in an attempt to allow businesses to keep enough cash flow to stay in business. Commercial paper is the source of funds businesses need to meet payroll and pay day-to-day bills. Since the beginning of September, the amount of U.S. commercial paper has declined by about $350 billion, or 20%, to $1.45 trillion. (Source: WSJ.com, IOU, Uncle Sam: Loans Start Today, October 27, 2008)

What It Means to You

The Fed's loan programs means that fewer businesses will go bankrupt due to cash flow problems, which was Washington Mutual's problem. It should also help to lower interest rates, thanks to increased liquidity problem. Most importantly, it will help ward off a potential global recession on the scale of Great Depression of 1929, which was caused by a lack of liquidity and resultant bankruptcies.

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