TOPICS > Economy

Fed to Provide Up to $540 Billion to Money Market Funds

BY Admin  October 21, 2008 at 4:45 PM EST

Federal Reserve Chairman Ben Bernanke

The Fed will provide up to $540 billion in loans to help the money market mutual fund industry in a new program called the Money Market Investor Funding Facility. Under the initiative, the Fed will back purchases of short-term debt including certificates of deposit and commercial paper that expire in three months or less from money market mutual funds, the Associated Press reported.

In a previous attempt to spark lending, the Fed on Oct. 7 agreed to buy commercial paper — the short-term debt companies use to fund day-to-day operations. The Fed also agreed on Sept. 19 to lend to banks to fund purchases of asset-backed commercial paper from money markets.

“The short-term debt markets have been under considerable strain in recent weeks as money market mutual funds and other investors have had difficulty selling assets to satisfy redemption requests,” the Fed said in an announcement of the move.

Lately, investors have been pulling money out of those mutual funds, which are normally viewed nearly as safe as cash, according to the Washington Post.

In this way, the Fed is hoping to take pressure off of the funds and to improve credit conditions so banks and other financial institutions will be more inclined to lend to each other and to consumers and businesses.

“The problem was much worse than we thought,” Jim Bianco, president of Bianco Research LLC in Chicago, said on Bloomberg Television. Policy-makers are trying to avoid a “Great Depression II,” he said.

Problems with money market funds worsened after the bankruptcy of Lehman Brothers on Sept. 15.

Then the following day, the Reserve Primary Fund, a $60 billion money market fund, announced it had “broke the buck,” meaning investors would be receiving back less than the $1 per share at which it usually trades, reported the Post.

That, along with the financial crisis as a whole, led to a run on the $1.7 trillion money market fund as nervous investors worldwide began pulling out their money.

Separately, Sen. Charles Schumer, D-N.Y., predicted Congress would return after Election Day to work on a measure similar to February’s $168 billion stimulus package, which included $600 tax rebates for most individuals and tax breaks for businesses, the AP reported.

The prospect of a new stimulus package received the backing of Fed chief Ben Bernanke during a House hearing on Monday.