Fed May See Lending to Companies, States as Next Crisis Fronts

Fed May See Lending to Companies, States as Next Crisis Fronts

www.bloomberg.com

Federal Reserve Chairman Ben S. Bernanke may find the next fronts of the financial crisis to be just as chilling as last month's downfall of Wall Street titans: its spread to corporate America and state and local governments.

Companies from Goodyear Tire & Rubber Co. and Duke Energy Corp. to Gannett Co. and Caterpillar Inc. are being forced to tap emergency credit lines or pay more to borrow as investors flee even firms with few links to the subprime-mortgage debacle. California Governor Arnold Schwarzenegger says his and other states may need emergency federal loans as funding dries up.

A cash crunch on Main Street would endanger companies' basic functions -- paying suppliers, making payrolls and rolling over debt.

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Short-term credit is drying up as banks hoard cash to save their own skins. Inter-bank lending rates (the LIBOR and EURIBOR) are at historic highs--meaning the cost of short-term loans between banks has become exorbitant, if the money will be lent at all.

In turn, companies and state and local governments cannot meet their short-term obligations--the proverbial cash-flow crisis, but on a global scale.

This is the next domino falling in the financial crisis, and is extremely worrying. Short-term loans such as these are the grease that keeps the economic engine running, and if these lending markets collapse, well--let's not go there.

So the FED will be lending directly to S&L governments and large companies as lender of last resort to stave off an even greater crisis of widespread defaults and bankruptcies.

www.bloomberg.com
(visit the link for the full news article)

Money-Market Rates Climb as Banks Hoard Cash, Crisis Deepens (Bloomberg)

[edit on 6-10-2008 by gottago]

When you have a society and economy based on debt then banks are king and they rule with an iron fist. I have learned a very valuable lesson here and I hope everyone else does.