Fed takes fresh steps to battle credit crisis

Fed takes fresh steps to battle credit crisis

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WASHINGTON - The Federal Reserve and foreign central banks agreed to pump billions of dollars into the global financial system Monday to unlock tight lending that threatens to unhinge the U.S. economy.

The Fed said the action is intended to “expand significantly” the cash available to financial institutions in an effort to relieve to the worst credit crisis since the Great Depression. In taking the action, the Fed cited “continued strains” in the demand for short-term funding.

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The inevitable had to happen: The Federal Reserve has the constitutional power to create money, and so the delay in passing the rescue bill put The Federal Reserve into creative mood. No one would be foolish enough to challenge the decision to pump billions into the financial system to ease the credit crunch that the economists are so afraid of.


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reply to post by stander

I really wish I knew what that means. As I read it now I understand it as that one way or another the Dollar is going to get Hyperinflated?

Either way, I doubt it will be good.

reply to post by Lebowski achiever

I really don't know; I can't tell the difference between the rock and the hard place.

Imagine that the rescue bill gets passed the way the original draft was written. Suppose that your paycheck shows each week a $800 figure. It should be more, but Uncle Sam takes a bit of it and then you settle things with the IRS on April 15 each year. Now suppose that two weeks from now, you paycheck shows $750. You ask around about it and it turns out that Uncle Sam has cut bigger chunk out of your paycheck. Now you know where the wind blows from: the bailout is kicking in. But that's NOT what would happen by any means. The money to buy the bad assets wouldn't be backed by any produced goods; the government would buy the bad assets with "electronic money." Much later, the government would have to decide how to get the "real money" from the taxpayers little by little.

Generally, when too much money is created, it doesn't match the real ability of the economy to produce goods and services. In credit based economies, the interest falls and the economy tries to invest and produce more goods and services to keep the equilibrium. If the economy is too extended and cannot keep the equilibrium, too much money is chasing after few goods and prices will rise.

Right now the Federal Reserve is pumping "fresh money" into the financial system -- it's a very complicated operation only the financial guys can follow. But the economy doesn't need this influx; the financial system does (that's the way the Feds feel about it), and so you are right in saying that this move will cause inflation. How high depends on the amount of extra money and the way it gets passed around.