Read article Fed Takes Steps to Add Liquidity The article doesn't mention the other new entitiy, what is it? What do these new changes mean for our economy?
I don't know, but let's do everything we can to keep the free & easy credit flowing. I need new rims for my SUV and money to fill the tank up with.
It seemed that instead of lowering interest rates, the Fed is throwing money all around in an effort to increase liquidity. I guess this is less visible than lowering of interest rates, but the nett effect seems to be the same, increase in inflation.
So in essence this is going to be increasing inflation from different outlets and industries? Wouldn't this basically be compounding inflation in a sense?
They are trying to increase liquidity, similar to lowering of interest rates hoping that the banks will lend more. But I guess the Fed misses the point that no matter what, the banks are reluctant to lend simply because their hands are full of sub primes. Whatever the interest rates, no matter how flush with liquidity the banks are, they aren't lending.....
After a bank initiates a loan they will often sell the re-payment rights to a third party investor minus administration & origination fees. They'll sell when they need to raise capital to increase reserves so they can keep lending. They sell to people like mutual funds, state & local governments or anyone looking for a "safe" low interest investment (a lot of bonds, charitable trust funds, etc...) Since the real interest rate is through the roof & there are record defaults since the wealth of the American consumer is largely tied to home values, no one wants to buy these loans. So the federal reserve will! Basically, this allows the banks to sell loans at below-inflation rate returns that probably won't get paid back to the American consumer (and anyone else holding a dollar). Something really funny I noticed about this: earlier in the week the president, sec. of the treasury, and congress were arguing about a bill that would have let the treasury or department of education buy student loans Before the "government" could make a decision and go through the "legal process," the Federal Reserve makes this announcement that they'll do it themselves ASAP.
That education bill is congress attempt to fix the problem that they have caused before election day. In 2006 Democrats came into congress screaming that Banks are making a profit through government subsidies on student loans, and that they are going to change that, and they did they cut the money that government gives to banks for underwriting student loans and with the cost of capital increasing because no one want to lend money in this environment regardless of what the fed is doing. Companies were losing money on student loans, they started pulling out of that market and congressman afraid of being blamed for the mess pushed the fed and treasury to accept these loans.
The subsidies they were putting on them after the ~2002 legislation change was a little absurd, considering the fact that banks were loaning mortgages to subprime borrowers at cheaper rates. Then again, the changes in 2007 were just as insane, to the point of destroying profitability. I worked for one of those student loan companies and they totally bailed on the loan side of their business so our online traffic was sort of made obsolete.
Lending is tough because a lot of people can't afford to pay the money back. Bankruptcy filings by U.S. consumers jumped 47.7 percent in April http://news.yahoo.com/s/nm/20080502...ruptcies_dc;_ylt=ArD2Zrqid7O3UeGTcT_o19Dv5rEF