The U.S. government is planning to spend more than $7.76 trillion to save the world’s financial system. The pledges, amounting to half the value of everything produced in the nation last year, are intended to rescue the financial system after the credit markets froze up some months ago.
The unprecedented pledge of funds includes $3.18 trillion already tapped by financial institutions in the biggest response to an economic emergency so far, and lending by the Federal Reserve last week was 1,900 times the weekly average for the three years before the crisis.
Moreover, the Fed took two new steps to unfreeze credit for homebuyers, consumers and small businesses, committing up to $800 billion.
The Fed will purchase as much as $600 billion of debt issued or backed by government-chartered housing-finance companies. It will also set up a $200 billion program to support consumer and small-business loans. The Fed is starting to use some of the unorthodox policy tools, hoping that the initiatives will bring down the interest rates on mortgages and consumer loans, offsetting the withdrawal of private-sector financing.
They’re trying to put funds into the system, trying to unfreeze these markets. Clearly, the Fed and the Treasury are beginning to take a large amount of credit risk. However, households and lenders may not respond much because of the wealth destruction from plunging property and stock values, and the deepening economic slump. That means banks may end up returning the Fed’s new liquidity through deposits at the central bank.
Investors, very much risk-averse amid the turmoil, are piling into super-safe Treasury securities, even as the U.S. government ships more supply out. Three-month bill rates dropped last week to 0.01 percent, the lowest since at least January 1940, and yields on Treasuries maturing in two through 30 years all fell to their lowest levels at least since the government began regular sales of the securities. The U.S. currency has surged about 17 percent against the euro, signaling demand for still more dollars.
The irony is that the U.S. is taking on the role of both lender and borrower of last resort for the global economy.
The Fed, which has already pumped out hundreds of billions of dollars, is flooding the world financial system with even more money. The Treasury, on course to borrow some $1.5 trillion this fiscal year, may tap global capital markets for even more to finance a fiscal stimulus package of $700 billion and provide additional bailout money for banks.
The greatest risk is that we are facing the threat of a deflationary breakdown of the world economy. It is possible that the Fed will cut the overnight lending rate to zero in January and hold it there throughout the year. As the economy deteriorates, deflation -- a sustained decline in wages and prices -- is emerging as a new threat. U.S. government figures last week showed that consumer prices excluding food and fuel costs fell in October for the first time since 1982.
The Fed and Treasury are being forced to bring out all kinds of measures because the extraordinary actions they’ve taken so far have failed. Credit markets are still collapsing, stock prices are still falling and the world economy is further sinking into a deeper recession.
By Chodechai Suwanaporn email: [email protected]
Source: www.fpo.go.th