Recently, the US Federal Reserve announced its plan to purchase significant numbers of short-term debts. Considered a radical move by many, the effort is an attempt to reinvigorate the flagging credit markets and keep the economy from nose-diving further.
The object of this buy out is a short-term financing mechanism known as commercial paper. This is what a number of companies use to pay for day-to-day operations, including supply orders and payroll. The Federal Reserve will operate under guidelines that were established during the 1930s to fight the Great Depression.
Commercial paper financing, a $99.4 billion a day market, relies entirely on investors to function rather than banks and other financial institutions. Unfortunately, that has been the problem in recent weeks as investors have become leery of the economic status of the markets. This has caused many pull to out their capital or limit their “paper” purchasing to every few days or overnight timeframes. As a result, companies no longer have the funds available to pay for their expenses and maintain operations. This leaves these companies extremely vulnerable.
The Fed’s plan involves establishing a new source for these companies to obtain the funds they need to keep functioning. In effect, the government becomes a creditor for general businesses as well as commercial banks and investment agencies.
This initiative involves the creation of an exclusive organization that purchases three-month unsecured and asset-backed commercial paper directly from companies that meet criteria for eligibility.
A spokesman from the US Treasury Department stated that the action is “necessary to prevent substantial disruptions to the financial markets and the economy.”
The department has been working in concert with the Federal Reserve to get this buy-out program running.
An undisclosed amount of money has been approved by the Treasury to be issued to the Federal Reserve Bank of New York in order to establish the new program, according to Fed representatives.
Ultimately, the Federal Reserve intends for this plan to reawaken the stalled commercial paper market and get things moving again.
Tags: short term debts
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According to the CPI, during the time the Federal Reserve has been in business, the value of a US dollar has fallen to 5 cents.
Only 5 cents to go before it is worthless.
The current crises we are in is deflationary but the long term trend still looks very inflationary because of what the Fed is currently doing with the money supply – http://research.stlouisfed.org/publications/usfd/page3.pdf