President George W. Bush signed the $700 billion Wall Street bailout package into law Friday and the stock market still tanked falling below 10,000 (Dow Jones Industrial Average) yesterday for the first time in four years. Investors weren’t convinced the package was going to make any difference and they voted with their dollars. As I write this the DJIA is hovering around 9930.
Now Federal Reserve Board chairman Ben Bernanke apparently signaled the Fed might buy $1.3 trillion worth of commercial paper. AP reports:
WASHINGTON – 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.
The Federal Reserve, invoking Depression-era emergency powers, 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 rose 45 points in morning trading, a day after a huge selloff put the Dow below 10,000 for the first time in four years.
The Fed said it is creating a new entity to buy three-month unsecured and asset-backed commercial paper directly from eligible companies. It hopes to have the program up and running soon, Fed officials said.
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 $1.3 trillion worth of commercial paper would qualify……
And, the report later notes, pressure is growing on the Fed to lower interest rates again.
When are these statist, Keynesian central bankers going to realize they are making the nation’s financial problems worse? When are they going to realize that no matter how hard you try you simply cannot control the economy?
You cannot control the business cycle. Stop trying.
POST SCRIPT: I concur with my colleague Jeremy Lott who reflects on the bailout-o-rama at Culture11.