Thursday, June 19, 2008

Federal Reserve Auctions Loans to Banks

Due to the economic problems that are affecting countries around the globe, many banks are reluctant to lend money to each other – let alone to consumers. As a result of this credit crunch, businesses and individuals cannot get their hands on the money they need to stay afloat. Obviously, this results in a catch 22 situation that only worsens the strength of the economy. After all, if banks are not in a situation to extend loans to consumers, consumers will not be able to purchase big-ticket items and the economy will falter. Similarly, without the help of loans, businesses cannot expand or hire additional workers.

In an effort to ease this problem, the Federal Reserve has auctioned $75 billion in loans to banks that are experiencing financial hardships. The goal is to help them overcome their credit problems so they can once again be an integral part of the economic cycle.

This program actually started back in December and this most recent auction is the 13th one to take place during that short time period. With this auction, banks were asked to pay a small 2.26% interest rate on short term loans that are good for only 28 days. In all, 73 institutions placed a bid and the Federal Reserve received bids for $95.9 billions worth of loans - $20.9 billion more than what was up for auction.

Obviously, banks are responding favorably to the program, which is meant to help them get over their credit problems. Of course, the fact that the need outweighed the available funds is not a very good sign.

The Federal Reserve has made some additional changes in an effort to alleviate the credit crunch. For example, the Federal Reserve has agreed to directly provide investment firms with emergency loans. Until now, this privilege was reserved only for commercial banks.

The Federal Reserve also lowered interest rates by one quarter percent point to 2 percent back in April. According to James Bullard, who is the president of the Federal Reserve Bank of St. Louis, the central bank does not have any immediate plans to make further cuts in interest rates.

"My sense is that the U.S. economy will be able to post stronger growth in the second half of this year despite the ongoing financial crisis and the drag from the housing sector," he said in a speech at the University of Wisconsin-Madison. "Such growth is likely to make the inflation outlook a more pressing concern for the Fed in the second half of this year."

Nonetheless, lending institutions are still struggling and are finding it difficult to extend credit to borrowers. Until this credit crunch is remedied, the economy will continue to have problems with getting back on its feet.

About the Author: Shannon Kietzman is a well known author and trusted resource. Shannon regularly writes for . For more info and to order your credit report with FREE credit score please visit

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