Fed seems sole defender of economy amid AIG uproar

WASHINGTON - In announcing plans to pump more than a trillion dollars into markets, the Federal Reserve seems alone in responding quickly to the shuddering economy now that the Treasury is engulfed by the AIG scandal.

By (AFP)

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Published: Sun 22 Mar 2009, 11:27 AM

Last updated: Sun 5 Apr 2015, 10:42 PM

To widespread surprise, the Fed unveiled a series of staggering measures Wednesday that could double its balance sheet, throwing an additional 1.15 trillion dollars at an intensifying financial crisis.

The central bank this week will begin to buy long-term Treasury bonds with a budget of up to 300 billion dollars over the next six months.

It will also spend up to 850 billion dollars in acquiring securities issued by mortgage fainance giants Fannie Mae, Freddie Mac and Ginnie Mae.

"Instead of waiting for markets to clear, the Fed has moved decisively to get the US economy moving," said Joseph Brusuelas, an analyst at Moody's Economy.com.

"Wednesday's surprise announcement is the surest sign that at least one arm of the federal government has the will to act in the face of the systemic crisis."

Brusuelas was referring to a plan to buy up toxic assets on banks' balance sheets announced by the Treasury in February but whose anxiously awaited details have yet to be revealed.

Treasury Secretary Timothy Geithner has faced a storm of criticism after American International Group (AIG), which has received more than 170 billion dollars in public rescue funds, paid massive bonuses to top executives, including some in the division blamed for putting the once-mighty insurer on the brink of collapse.

US media reported Saturday that the payments totalled 218 million dollars, 50 million dollars higher than the 165 million AIG has disclosed it paid in March. But the higher figure included retention pay handed out in December.

"The Fed is likely to be concerned that politics and confusion are preventing the Treasury from doing its part in the bailout effort," said Ethan Harris at Barclays Capital.

His Barclays colleague, Julia Coronado, said that Fed policymakers "have concluded they cannot wait around for the Treasury and Congress to solve the problems and need to be more aggressive in getting financial markets moving."

The Treasury's work as the economy sinks into a second year of recession has been further complicated by the extreme isolation of Geithner, whose team remains largely unconfirmed by the Senate.

The Fed's intervention on the bond market should lower the yield on long-term Treasury bonds, driving investors to purchase other financial instruments, such as company bonds, that would inject much-needed capital into companies squeezed by the credit crisis.

For Brusuelas, the Fed's purchases of long-term Treasury bonds would lower rates on a host of financial instruments.

The stepped-up buying of mortgage-backed securities was expected to lower mortgage rates, which in turn would "stimulate refinancing activity" that could put extra money into households' strained budgets, he said.

Deutsche Bank economist Joseph LaVorgna said that recent signs of stabilization in depressed consumer spending were no harbingers of a rebound in the main driver of the US economy "for three primary reasons: wealth destruction, tight credit and rising unemployment."

"The good news is that the Fed is firing all its weapons at the recession," said Nigel Gault, chief economist at IHS Global Insight.

"The bad news is that the recession is severe enough that all weapons are needed."

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