Amid a slumping economy, the Federal Reserve has resorted to some unusual methods to stave off a recession, most notably its role in coordinating the bailout of lending giant Bear Stearns. Economics experts examine the Fed's action and the state of the credit markets.
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Shockwaves rippled across international financial markets and Wall Street today, a day after the Federal Reserve took the unusual step of announcing on a Sunday it helped coordinate and provide loans to help JPMorgan Chase buy the troubled investment firm Bear Stearns.
To do that, the Fed secured a $30 billion loan to JPMorgan Chase. That loan will be backed by assuming direct control over the Bear Stearns assets. If those assets decline in value, the Fed will bear the cost.
The central bank also offered to be a lender of last resort to some 20 investment banks, and it reduced the short-term discount rate by 0.25 percentage points, which lowers the rate banks are charged for emergency loans.
Outside the White House today, Treasury Secretary Henry Paulson defended the Fed’s steps.
HENRY PAULSON, U.S. Treasury Secretary:
I very much support the Fed’s action. I was working there right beside them, helping execute this strategy.
Again, to step back, we place a high priority on the orderliness of our financial markets, this is very, very important, and the stability in our financial markets.
Bear Stearns had a liquidity crisis. And so we felt it was very important that this be resolved as a way to minimize the impact on our economy. And so these actions were all consistent and it was important that this be resolved before the markets opened in Asia on Sunday afternoon.
Federal Reserve officials will weigh another big cut to a key interest rate in their meeting tomorrow.