Will the Fed have to monetize a massive amount of private sector debt?
*AP, by Jeannine Aversa, October 7, 2008:
"Fed to Buy Massive Amounts of Short-Term Debt
The Federal Reserve announced Tuesday a radical plan to buy massive
amounts of short-term debt in a dramatic effort to break through a
credit clog that is imperiling the economy.
Invoking Depression-era emergency powers, 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 purchasing supplies or
making payrolls.
In more normal times, about $100 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 days.
That has made it increasingly difficult and expensive 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 unstable situation has left many companies vulnerable. The notion
under the plan is for the government to provide a 'backstop' that would
give companies a new place to get cash, the Fed said. The action makes
the Fed a crucial source of credit for nonfinancial businesses in
addition to commercial banks and investment firms.
The Fed's action initially helped lift investors' spirits, although
concerns about the economy dampened their enthusiasm. The Dow Jones
industrials — which gained about 145 points just after the open — fell
nearly 40 points in late morning trading. Monday, a huge selloff put
the Dow below 10,000 for the first time in four years."
*This information is solely a highlight of the opinion of a third-party publication and is incomplete. Please subscribe to this publication for the full and timely opinion of the author and call a Monex Account Representative for any additional up-to-date information. This is not an offer to buy or sell precious metals. Investors should obtain advice based on their own individual circumstances and understand the risk before making any investment decision.
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