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US Fed to buy up more debt to combat crisis
October 09, 2008
THE Federal Reserve announced yesterday a radical plan to buy massive amounts of short-term debt in a dramatic effort to break through a credit clog.
The Fed will buy commercial paper, a short-term financing mechanism that many companies rely on to finance their day-to-day operations, such as making payrolls.
In more normal times, about US$100 billion ($146 billion) of these short-term IOUs were outstanding at any given time, sold by companies to buyers that included money market mutual funds, pension funds and other investors.
But this market has virtually dried up as investors have become too jittery to buy paper for longer than overnight or a couple of days. That has made it increasingly difficult for companies to raise money to fund their operations.
Commercial paper is a way of borrowing money for short periods, typically ranging from overnight to less than a week.
The action makes the Fed a crucial source of credit for non-financial businesses in addition to commercial banks and investment firms.
Fed officials said they'll buy as much of the debt as necessary to get the market functioning again. They refused to say how much that might be, but they noted that around US$1.3 trillion worth of commercial paper would qualify.
The Treasury will provide money to the Federal Reserve Bank of New York to support the programme. Fed officials would not say how much but believed it would be substantial.
AP
US Fed to buy up more debt to combat crisis
October 09, 2008
THE Federal Reserve announced yesterday a radical plan to buy massive amounts of short-term debt in a dramatic effort to break through a credit clog.
The Fed will buy commercial paper, a short-term financing mechanism that many companies rely on to finance their day-to-day operations, such as making payrolls.
In more normal times, about US$100 billion ($146 billion) of these short-term IOUs were outstanding at any given time, sold by companies to buyers that included money market mutual funds, pension funds and other investors.
But this market has virtually dried up as investors have become too jittery to buy paper for longer than overnight or a couple of days. That has made it increasingly difficult for companies to raise money to fund their operations.
Commercial paper is a way of borrowing money for short periods, typically ranging from overnight to less than a week.
The action makes the Fed a crucial source of credit for non-financial businesses in addition to commercial banks and investment firms.
Fed officials said they'll buy as much of the debt as necessary to get the market functioning again. They refused to say how much that might be, but they noted that around US$1.3 trillion worth of commercial paper would qualify.
The Treasury will provide money to the Federal Reserve Bank of New York to support the programme. Fed officials would not say how much but believed it would be substantial.
AP
