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Fed Offers $40 Billion to Bolster Global Economy

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Fed Offers $40 Billion to Bolster Global Economy

Economy

Fed Offers $40 Billion to Bolster Global Economy

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MICHELE NORRIS, host:

From NPR News, this is ALL THINGS CONSIDERED. I'm Michele Norris.

ROBERT SIEGEL, host:

And I'm Robert Siegel.

The Federal Reserve is back in the news today, one day after disappointing the financial markets with an interest rate cut that was ruled as inadequate.

Today, the Fed announced that it's ready to pump an additional $40 billion into the banking system, and that it's working with other central banks to help ease problems overseas.

Joining us now to talk about the Fed's latest move is NPR's Adam Davidson.

And Adam, this all has to do with follow up on the subprime mortgage mess. What exactly did the Fed do today?

ADAM DAVIDSON: Well, put most simply, the Fed invented a new way to create money. And they're going to use this new way to put - you mentioned $40 billion, that's just this month; they're going to be putting probably another $40 billion into the U.S. economy next month and probably months after that even more money.

The details are sort of complicated and technical. Basically, they're going to auction off federal bonds to banks that want them. But what this does is solve a really big problem that the U.S. financial system has had since August. Bankers have been nervous in a way they normally are not nervous. So many banks lost money with those subprime mortgages that banks stopped lending money to each other. And we really need banks to lend money to each other. That's how money moves around the system, that's what fuels the U.S. and the global economy, and money has been freezing up. And so what the Fed is doing is pouring in those tens of billions more to get things moving again.

SIEGEL: And it wasn't just the Fed, it wasn't just the U.S. Central Bank. It was a unified global announcement from central banks around the world.

DAVIDSON: Yeah, which is very unusual. This hasn't happen since 9/11 and doesn't happen very often at all. Basically, this is a global credit problem. Banks all over the world are affected. Even though those subprime mortgages were all in the U.S., banks all over the world invested in securities based on them. So the Fed couldn't just solve the problem by dealing with the U.S. alone, it needed a global solution.

And so it worked out this system with the central banks of Europe, of Canada, of England, of Switzerland. It's basically a system to funnel dollars from the U.S. Central Bank, the Fed, to banks in those other countries. Those central banks in those other countries can only deal with their local currency, they can't give dollars, but everyone wants dollars because dollars are the global currency. So this system gets dollars from the U.S. out into the rest of the world.

SIEGEL: I assume it takes more than 24 hours to work this out for the percentage of banks. (Unintelligible), it does seem to be the response from the Fed to the market's response to what the Fed did yesterday, which was why didn't you do more for us and what have you done for us lately?

DAVIDSON: It is kind of funny. I mean, this all over the economic blogosphere. Yesterday, the stock market clearly was screaming out - we hate you Ben Bernanke, we really are disappointed in what you did. And so there's been a lot of talk, oh, he must have come up with this to deal with that. But this is a really complicated system, there's no way they whipped it together in one night.

SIEGEL: So the credit crisis is over?

DAVIDSON: I would say not. I mean, I think a lot of the short term problems will not be as bad. There will be more fluidity in the system, but there's a lot of subprime mortgage investments out there. There's a lot more scary news to come for banks. So…

SIEGEL: I'm sure there'll be a lot more talks with you about it, Adam.

DAVIDSON: I would guess so. And thanks, Robert.

SIEGEL: It's NPR's Adam Davidson in New York.

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