The Federal Reserve surprised the financial world Wednesday by announcing a plan to inject cash into the international banking system to alleviate a severe credit squeeze that many believe could trigger a recession.
Coming on the heels of a quarter-point drop in the Federal Reserve's key lending rate Tuesday, the nation's economic policymakers want to include their counterparts in Europe, in what is seen as the biggest act of global economic cooperation since the aftermath of the Sept. 11, 2001, terrorist attacks.
Under the plan, the Fed said in a statement it would make up to $24 billion available to the European Central Bank and the central banks in Canada, England and Switzerland. It will also provide $40 billion to American banks through a series of auctions this month and in January.
The infusion of capital, the Fed hopes, will allow banks to loosen their lending requirements. Banks have been reticent to finance business investments in recent months because of the dramatic increase in foreclosures in this country, because many loans for new investment are backed by mortgages held by people on Main Street.
Inland Southern California saw 31,661 foreclosure-related filings in the third quarter, including defaults, foreclosure auctions and lender repossessions. That was one filing for every 43 households, more than four times the national average of one filing in 196 households.
Redlands-based economist John Husing said the Fed's plan to work in concert with European and Canadian banking systems could pay off for some Inland homeowners.
The rates for the majority of those who hold adjustable mortgages are tied to British bank rates, Husing said, and the infusion of money means the resets might not happen at a rate as high as it would be without the Fed's move.
He said the inclusion of foreign central banks underscores how serious Federal Reserve now views the meltdown of the subprime mortgage market.
"It's the issue we did not see," Husing said of the international credit crunch. "We thought that mortgages were all about the regional housing market. But, internationally, it's much bigger and much scarier."
As the subprime crisis worsens, Husing and other economists say the central banks of different countries stopped cooperating, because they didn't know where the situation was heading.
Analysts say this move is more likely to ease the credit squeeze than Tuesday's rate cut, which dropped the lending rate to 4.25 percent, the third quarter-point trim since September. Many were disappointed the Fed did not make it a half-point cut.
"I don't think (the Fed) really realized the extent the credit crunch would hinder the economy," said Mark Schniepp, a Goleta-based economist and author of the California Economic Forecast. "I think they should have lowered the interest rate sooner and could have lowered it more."
Schniepp said the Fed's action is largely symbolic but could help California consumers. Additional liquidity will free up money for the would-be borrowers, especially those seeking so-called "jumbo" loans, mortgages for houses priced higher than $400,000 that are too expensive to qualify for federally-backed mortgages.
Mike McDonald, president of Dollar Crises and Recovery Partners, a Palm Desert-based investment advisory firm, said this might help break the real estate logjam by convincing lenders that it's safe to free up some money. Banks will recognize the political pressure to avoid pushing the country into a recession, he said.
"Once the light shines on it they will do what has to be done," McDonald said. "A year ago it was not done. They never act before they're forced to act, it's just the nature of the beast.
"Now, it's a day late and a dollar short," McDonald said.
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source: pe.com
