The New $800 Billion Pledge Comes as a Desperate Step for the US Government

November 26, 2008

(ChattahBox) — The Federal Reserve’s new $800 billion effort to fight the deepening financial crisis comes as a desperate measure from the government. The government is pulling out all stops to make credit more accessible to consumers who are not ready to avail to more debt. Householders and lenders are not ready to respond to the new credit being available to them due to the wealth destruction experienced by many. This could mean that the banks would end up returning the money through deposits at the Central bank.

“We are sort of spitting in the wind,” said Michael Darda, chief economist at MKM Partners LP in Greenwich, Connecticut. “Banks won’t be throwing a lot of loans out there when they fear — rationally — those loans may not be paid back.”

The US government aims to print as much money to revive the nation’s crippled banking system. The government has assumed as much as $7.8 trillion worth of financial obligations either directly or indirectly. This financial obligation is nearly equal to country’s entire economy. Out of these $7.8 trillion, $1.4 trillion has been committed to loans, capital infusion, banks and rescue of financial firms like AIG and Bear Stearns.

The Federal government had earlier announced that it would swoop in and buy up to $600 billion in debt tied to mortgages guaranteed by Fannie Mae and Freddie Mac. “This is the kind of thing the Fed does when it’s really worried,” says William Cheney, chief economist at John Hancock Financial. “The Fed has decided to go in on a massive scale and replace the role of private investors to jump-start … markets. They’re doing it on a scale that is quite staggering.”


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