|
WASHINGTON — The world’s leading economic policymakers
Tuesday took major actions to try to stabilize financial
markets—and suggested that more measures were on the
way.
Hours
after the Federal Reserve unveiled a program in which it
could ultimately buy up to $1.3 trillion in private
debt, chairman Ben Bernanke signaled that the central
bank may soon cut interest rates. Meanwhile, the British
government was preparing an emergency plan that could
inject tens of billions of dollars into its banks. The
European Union raised its protections on bank savings,
and finance ministers of its member nations pledged to
better coordinate their response to the financial
crisis.
Markets
were hardly assuaged, especially in the United States.
The Dow Jones industrial average declined for a fifth
consecutive day, falling 508 points, or 5.1 percent. The
Standard & Poor’s 500-stock index dropped 60.66, or 5.7
percent; it is down 15 percent this month.
The US
declines followed a gloomy assessment from Bernanke, who
said in a speech Tuesday that the deepening financial
crisis had darkened the country’s economic outlook.
Investors were also concerned that banks and real estate
companies are in even more trouble than had been
thought, following the announcement late Monday that
Bank of America will chop its dividend.
Separately Tuesday, the rate that banks charge for loans
to each other, a crucial measure of the flow of credit,
rose.
The
troubling signs came despite a morning announcement that
the Fed will buy up commercial paper, the short-term
debt that funds the daily operations of banks and
ordinary businesses. In a bold new attempt to jump-start
the lending that is the lifeblood of American business,
the central bank said it would create a special entity
to purchase this short-term debt.
The
investors who normally snap up those relatively low-risk
investments, such as college endowments and money market
mutual funds, aren’t doing so. That is causing pressures
throughout the financial system that are damaging the
overall economy. So the Fed has moved to essentially
funnel cash to companies—up to the entire $1.3 trillion
of high-quality commercial paper that has been issued.
“The
central bank is finally starting to get aggressive,”
said Drew Matus, a senior economist at Merrill Lynch.
“Now they’re trying to keep things functioning until the
Treasury plan starts up,” he said, referring to the
$700-billion fund to buy up troubled assets from
financial firms.
Tuesday’s action by the Fed could even lay the
groundwork for future interventions in credit markets,
should the troubles deepen.
“It
could be expanded for different types of securities,”
said Michael Feroli, a US economist at J.P. Morgan
Chase. “Today Bernanke said they’re going to continue to
be aggressive and innovative, and I don’t expect that to
slow down anytime soon.”
In his
speech Tuesday afternoon, Bernanke indicated that the
Fed could cut interest rates soon to try to shield the
economy against the fallout from the financial crisis.
Prices in futures markets indicate that investors are
nearly certain rates will be cut at the Fed’s October 28
to 29 policymaking meeting, if not before.
The
combination of recent sour economic data and the crisis
“suggests that the outlook for growth has worsened and
that the downside risks to growth have increased,”
Bernanke told the National Association of Business
Economics Tuesday. As a result, the central bank “will
need to consider whether the current stance of policy
remains appropriate,” a clear sign that rate cuts are on
the table.
Under
Bernanke, the Fed has cut rates between regularly
scheduled meetings just once, this past January. But
Bernanke used milder language Tuesday than he did in an
early January speech that foreshadowed that cut,
suggesting there is no certainty the Fed will move as
quickly and aggressively as many Wall Street analysts
are forecasting.
In
particular, some Fed leaders have indicated in speeches
that they think that rate cuts won’t have their intended
impact—of lowering borrowing costs and thus stimulating
the economy—so long as world credit markets remain a
mess. And they worry that the price of oil has been so
volatile lately that rate cuts could end up hurting
Americans’ purchasing power by driving the price of oil
up and the value of the dollar down.
The
financial crisis strikes at the heart of Americans’
ability to continue buying the things they need,
Bernanke said in his speech.
“Even
households with good credit histories are now facing
difficulties obtaining mortgage loans or home equity
lines of credit,” Bernanke said. “Banks are also
reducing credit-card limits, and denial rates on
automobile loans reportedly are rising.”
Offering
fresh evidence of the depth of the problem, the Fed
released data Tuesday indicating that the amount of
consumer debt Americans have outstanding had its first
monthly decline in a decade in August. And that was
before the credit crisis deepened in September and
October.
Although
a rate cut would be aimed at encouraging overall
economic growth, the new Fed action on commercial paper
is designed to get more at the nub of the problem, a
crisis of confidence among banks and other lenders.
The Fed
is using emergency authority it was granted during the
Depression to lend to any “individual, partnership or
corporation,” in “unusual and exigent circumstances.” It
used that authority two other times this year —to rescue
Bear Stearns and take over American International Group.
This time, for the commercial paper program, the
Treasury Department will help provide funding.
In
previous lending programs this year, the Fed has loaned
only against strong collateral. But now the Fed will
even take on “unsecured” debt, or that which is backed
only by the faith of the company borrowing money. It
will require insurance fees on companies borrowing money
with unsecured debt to protect against losses.
Critically, the Fed will buy debt that is for
three-month terms. Lately, a wide variety of companies
have only been able to borrow money overnight. That has
put them in a precarious position of having their fates
decided every evening, as lenders must again review
whether to renew the loans.
By
having the government ready to buy slightly longer-term
debt, that uncertainty should be diminished, Fed
officials are hoping.
The Fed
entity will pay interest rates that are lower than the
extremely elevated rates of recent days, but still
higher than what the companies could borrow at in normal
times. That way, once financial conditions return to
normal, the companies needing money will naturally
migrate back to private markets so as to get lower
borrowing costs.
“It
seems like the program is well designed to allow the
normal functioning of the commercial paper market to
resume,” said Matus, the Merrill Lynch economist.
In the
speech Tuesday, Bernanke for the first time defended his
decision not to intervene to save Lehman Brothers, the
investment bank that filed for bankruptcy protection
last month, helped trigger a worsening of the crisis.
It boils
down to: The Fed had little choice. “We determined that
either facilitating a sale of Lehman or maintaining the
company as a free-standing entity would have required a
very sizable injection of public funds—much larger than
in the case of Bear Stearns—and would have involved the
assumption by taxpayers of billions of dollars of
expected losses.”
“Neither
the Treasury nor the Federal Reserve had the authority
to commit public money in that way,” Bernanke said. He
drew a contrast with the Bear Stearns and AIG bailouts,
in which the Fed made loans that it fully expects to be
paid back. (The Washington Post) |
