The Federal Reserve and US government vs. Credit Crunch

What did the US government and the Federal Reserve decide to do? – You will need to describe the steps the US government and the Federal Reserve have taken to try to mitigate the crisis.

The Federal Reserve and the US government have initiated steps to cut down the crisis and build some liquidity in the severely damaged areas of the financial markets. The estimated damages of the credit crunch regarding the US could exceed over $1.5 trillion. The Federal Reserve is cutting rates in half of their original percentages and recently up to 3 quarters. Such action has pressured the main central banks such s the Bank of England, but it was necessary to help the credit crisis cool down. The Federal Reserve has also been given around $30 billion to the banks monthly in order for them to recuperate.

The Federal Reserve has though taken bigger steps recently on March 11, 2008 where it decided to increase the amount of money given to banks for the month of March. The amount will include $100 billion. This is done in order for banks to keep circulating money and lend to their customers. This action plan is due for 6 months and the Federal Reserve is entitled to donate more if the crisis does not slow down.

It is also central banks along with the Federal Reserve to provide the money markets with bullions of dollars. The European Central Bank and the Central Banks from Canada, Switzerland, along with the UK will partake in the action. Today, $200 billion is the amount of money that is going to be circulating and given to the money markets in order to boost the world economy. Banks are in some tension between each other because they hold enough money to lend but since the credit crunch erupted they are less tempted to make transactions with each other and believe that each bank has insufficient assets.

Many countries are under the credit crunch and are beginning to show negative signs that will not ameliorate soon such as inflation in Egypt, most EU countries and even in the Balkan region. The Credit Crunch has started in the US and has affected the world economy and many countries and economists believe that the US will enter recession. The US government and the Federal Reserve believe in their action plan. It is important to understand that there is a great loss of confidence within the financial system. Banks and the financial market are built among our confidence. Banks act as a trust system. In the short run, banks can keep injecting money into the financial markets to help the liquidity downturn. But in the long run, the situation may become shaky. Not all customers will be paid back and the people will help pay up for the debts through taxes. The US government has raised taxes as well as a solution to ease the credit crunch.

The Federal Reserve is taking some actions that can end up risky when using assets that could hold mortgage securities which were the initial spark behind the crisis. The US government and the Federal Reserve have agreed with the European Central Bank to lend funds in dollars. Such step is called a currency ‘swap’ agreement meaning that banks bid for around $30 billion in funds while the European Central Bank assigned a portion of the $15 billion agreed lent to the US Federal Reserve.

The Federal Reserve is not only helping banks out but investment houses such as the Wall Street one. This will help the financial markets access funds with more confidence. The Federal Reserve is ready to risk more and is most likely to impose a bigger cut on interest rates which will affect businesses and people but it is needed in order to keep the business world flowing. The past week, the Federal Reserve emerged out with a program that gives emergency loans to the top 20 dealers in the US. The dealers are investment banks and are connected to the Federal Reserve since they possess most of the Treasury securities.

Since the beginning of the credit crunch, the Federal Reserve has been cutting interest rates and discount rates, along with injecting assets in the money market and is now directly borrowing from banks in order to stir away from a recession in the United States. The credit crisis will not end so fast and it will take a world effort to resolve it.

-Giverny Lowe