Archive for the ‘interest rates’ Category

Bank bailout could cost $4 trillion

January 28, 2009

The cost of the bank bailout is likely to be much higher than $700 billion.

While the Obama administration hasn’t asked Congress for more money yet, some experts warn that government spending on support for struggling financial services companies will ultimately reach into the trillions of dollars.

The first half of the controversial $700 billion program to help banks has already been spent — mostly on buying up preferred shares of troubled banks.

By Colin Barr, senior writer
Fortune

Part of the remaining $350 billion may be used to purchase troubled assets from bank balance sheets and place them in what Federal Deposit Insurance Corp. chief Sheila Bair has dubbed an “aggregator bank.”

And while taxpayers will surely recover some of that sum eventually, more money is likely to be needed in order for the bank rescue to work.

“The amount of working capital you’d expect the government to take into this would be around $3 trillion to $4 trillion,” said Simon Johnson, a senior fellow at the Peterson Institute for International Economics and author of its Baseline Scenario financial crisis blog.

Johnson, who until last year was the chief economist at the International Monetary Fund, said that banks will need more rounds of capital from the government because their cushion against losses is too thin. He also said that there is a need to get rid of some of the toxic assets weighing on financial institutions before they can recover.

Read the rest:
http://money.cnn.com/2009/01/27/news
/bigger.bailout.fortune/index.htm?postve
rsion=2009012711

Fed Delivers Gloomy Economic Outlook

January 28, 2009

The Federal Reserve, gave a bleak outlook for the U.S. economy, saying that while it expected a “gradual recovery” to begin later this year, significant risks remain.

“Industrial production, housing starts, and employment have continued to decline steeply, as consumers and businesses have cut back spending,” the Fed said in the statement. “Furthermore, global demand appears to be slowing significantly.”

Fed Chairman Ben Bernanke and his colleagues are battling a three-headed economic monster: crises in housing, credit and financial markets that — taken together — haven’t been seen since the 1930s.

From CNN Business:
http://money.cnn.com/2009/01/28/news/econ
omy/fed_decision/index.htm?postversion=
2009012814

From the Associated Press:
http://news.yahoo.com/s/ap/20090128/
ap_on_bi_ge/fed_interest_rates

Federal Reserve Chairman Ben Bernanke before testifying before ... 
Federal Reserve Chairman Ben Bernanke before testifying before the House Financial Services Committee on Capitol Hill, November 18, 2008.(Molly Riley/Reuters)

U.S. Economy and the Printing Press Cure

December 22, 2008

The Federal Reserve as much as admitted last week that lowering the benchmark interest rate — even to zero — would not be powerful enough medicine to revive today’s ailing economy. And so it has opted for the printing-press cure, pledging for the foreseeable future to pump vast sums into banks, other financial firms, businesses and households.

New York Times Editorial
.

Economic history — of the Great Depression of the 1930s and Japan’s lost decade in the 1990s — suggests that the Fed is doing the right thing. Confronted then, as now, with the twin scourges of deepening recession and incipient deflation, governments did more damage with too little intervention than they would have done with too much.

But that doesn’t make such intervention “good.” It’s a big and unfortunate risk in itself.

Flooding the economy with freshly printed money may prevent a self-reinforcing downward spiral. But it may cause trouble long after the present danger has passed. One reason is that it could cause inflation later. In a worst-case scenario, inflation, or the fear of inflation, could dissuade foreign investors, who finance the United States’ debt, from buying and holding dollars. That, in turn, could provoke a disorderly decline in the currency, sending prices and interest rates sharply higher.

For the Fed, engineering the new rescue programs is a technical challenge. It will have to be remarkably deft in draining the system of excess dollars in a timely way. It will also need to be vigilant for signs that the dollar is being unduly pressured, and be prepared to react.

For Barack Obama, the challenge is one of leadership. As president, Mr. Obama will have to convey optimism without overpromising. He will have to inspire confidence, even in the absence of a dramatic turnaround — which is simply not in the cards. To his credit, Mr. Obama has already warned the American people that conditions will get worse before they get better.

In the attempt to make them better, the Obama administration will first face the question of the size of the stimulus. The latest numbers are in the $700 billion range. The economy certainly needs the help, but Obama officials will have to be mindful of the possible long-term negative effects of their outsized borrowing. They must also ensure that the money is not misused to benefit high-income constituents. To jump-start the economy requires getting money to those who will spend it fast and in full. That includes unemployed workers, low- and middle-income families, and state and local governments.

Read the rest:
http://www.nytimes.com/2008/12/22/opinion/22mon1.html