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October 14th, 2008

Part 2: What’s Being Done to Solve the Problem



Following our post “Part One: How Did We Get to This Point,” part two discusses the current and ongoing measures taken by our government to heal and correct our financial crisis by restoring the natural monetary flow of order to the banking system, one that has been seized up by the lack of lending.

By now most of you are somewhat familiar, or at least have heard of, the $700 billion rescue plan named TARP, the Troubled Asset Relief Program. Simply, TARP plans to use up to $700 billion to purchase so-called “toxic” mortgage and financial assets from financial institutions, lenders, and investors that have left them financially unable to operate at healthy levels. With the “support plan” now in place, lenders and investors should begin clearing a certain amount of the bad assets off their books. This is designed to loosen up credit for all borrowers. The devastation of the credit crisis has infected commercial lending, business credit, credit cards, auto financing and other areas of the economy. With both consumers and businesses alike being starved for credit, the economy faces serious peril.

While the US Treasury Department is in the process of purchasing the bad assets, it will take a number of weeks to get their program moving. In the meantime, the government has enacted numerous other programs and initiatives designed to make an impact much sooner.

1. The Federal Reserve has wasted no time enacting unprecedented actions designed to jump-start credit markets by promoting both public and private borrowing. The Fed has increased both the 84- and 28-day Term Auction Facilities (TAF) to $150 billion each. This increase, the highest ever offered by the Fed, will allow more financial institutions to apply for term lending (such as the TAF) through the Federal Reserve.

The Fed has begun paying interest on the commercial bank reserves, as well as the excess reserves that they hold. These initiatives will aid banks in growing their capital base. Under the current economic conditions, it has become extremely difficult for banks to go into the market and seek additional capital. Undercapitalization has been a main reason many banks have failed.

2. As part of a global initiative to curb financial distress, the US Federal Reserve cut its target for the Federal Funds interest rate to 1.50% on October 8. The between-meeting move wasn’t entirely unexpected, but it came as part of a coordinated international campaign to stimulate economies.

3. Just this morning President Bush announced, among other initiatives, that the US plans to invest up to $250 of the proposed $700 billion in the nation’s largest financial institutions by purchasing shares of their stock. The move — one that both Bush and Treasury Secretary Henry Paulson stressed as temporary — is designed to re-establish confidence, increase lending, and restore order to the US banking system.

Do you think the US government has done enough to keep to their promise of doing everything they can to correct our financial crisis? Leave us a comment, let us know what you think!

Coming soon: Part Three: Where Do We Go From Here?

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About the HSH Blog

HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni

Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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