[Peace-discuss] the fed fires up the air pump yet again

[E. Wayne Johnson]

The Austrian economists see Monetary Policy, which is hardly ever 
discussed in American Politics, as being one major problem,
hence the endless chanting of End the Fed, End the Fed, End the Fed from 
that sector.  They see the unrestrained
unexamined, unsupervised activities of the banking cartel known as the 
Federal Reserve as one giant root of the
current economic crisis.  The Fed can print more fiat money at will, 
pumping more air into the balance sheet.

Those calling for examination and even elimination of the Fed are trying 
to put their foot on the air hose of the Empire.
Some opposition is natural.

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*Fed Pumps Further $630 Billion Into Financial System (Update3) *
By Scott Lanman and Craig Torres (bloomberg.com)

Sept. 29 (Bloomberg) -- The Federal Reserve will pump an additional $630 
billion into the global financial system, flooding banks with cash to 
alleviate the worst banking crisis since the Great Depression.

The Fed increased its existing currency swaps with foreign central banks 
by $330 billion to $620 billion to make more dollars available 
worldwide. The Term Auction Facility, the Fed's emergency loan program, 
will expand by $300 billion to $450 billion. The European Central Bank, 
the Bank of England and the Bank of Japan are among the participating 
authorities.

The Fed's expansion of liquidity, the biggest since credit markets 
seized up last year, came hours before the U.S. House of Representatives 
rejected a $700 billion bailout for the financial industry. The crisis 
is reverberating through the global economy, causing stocks to plunge 
and forcing European governments to rescue four banks over the past two 
days alone.

``Today's blast of term liquidity will settle the funding markets down, 
and allow trust to slowly be restored between borrowers and lenders,'' 
said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi 
UFJ Ltd. in New York. On the other hand, ``the Fed's balance sheet is 
about to explode.''

The MSCI World Index of stocks in 23 developed markets sank 6 percent, 
the most since its creation in 1970. Credit markets deteriorated further 
as authorities tried to save more financial institutions from collapse.

European Rescue

European governments have rescued four banks in two days and the Federal 
Deposit Insurance Corp. said today it helped Citigroup Inc. buy the 
banking operations of Wachovia Corp. after its shares collapsed. The 
Standard & Poor's 500 Index fell 3.8 percent and the cost of borrowing 
dollars for three months rose to the highest since January. The rate for 
euros hit a record.

``If people think the authorities may give in to fears, they are 
wrong,'' Financial Stability Forum Chairman Mario Draghi said today in 
Amsterdam, where the international group of regulators and finance 
officials is meeting. ``There is willingness and determination on 
winning the battle to restore confidence and stability.''

Banks and brokers have slowed lending as they struggle to restore their 
capital after $586 billion in credit losses and writedowns since the 
mortgage crisis began a year ago. The bankruptcy of Lehman Brothers 
Holdings Inc. also sparked fears among banks they wouldn't be repaid by 
counterparties, driving up the cost of short-term loans between banks.

Funding Risk

``By committing to provide a very large quantity of term funding, the 
Federal Reserve actions should reassure financial market participants 
that financing will be available against good collateral, lessening 
concerns about funding and rollover risk,'' the central bank said.

The Bank of England and the ECB will each double the size of their 
dollar swap facilities with the Fed to as much as $80 billion and $240 
billion, respectively. The Swiss National Bank and the Bank of Japan 
will also double their dollar swap lines, while the central banks in 
Australia, Norway, Sweden, Denmark and Canada tripled theirs.

All the banks extended their facilities until the end of April 2009.

The Fed is also increasing the size of its three 84-day TAF sales to $75 
billion apiece, from $25 billion. That means the Fed will make a total 
of $225 billion available in 84-day loans. The central bank will keep 
the sales of 28-day credit at $75 billion.

Special Sales

In addition, the Fed will hold two special TAF sales in November 
totaling $150 billion so banks can have funding available for one or two 
weeks over year-end. The exact timing and terms will be determined 
later, the Fed said. The TAF program began in December, totaling $40 
billion.

The bank-rescue plan being debated by Congress today would give the Fed 
more power over short-term interest rates by providing authority as of 
Oct. 1 to pay interest on reserves held at the central bank by financial 
institutions. That would make it easier for the Fed to pump funds into 
the banking system.

Paying interest on reserves puts a ``floor'' under the traded overnight 
rate, which would allow a central bank ``to provide liquidity during 
times of stress'' without affecting the rate, New York Fed economists 
said in a paper last month.

To contact the reporter on this story: Scott Lanman in Washington at 
slanman at bloomberg.netCraig Torres in Washington at ctorres3 at bloomberg.net.

Last Updated: September 29, 2008 14:28 EDT
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