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Fed auctions $50b to help banks fight credit woes

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Associated Press / March 26, 2008

WASHINGTON - Fighting to ease a dangerous credit crisis, the Federal Reserve has provided a total of $260 billion in short-term loans to squeezed banks since December to help them overcome credit problems.

The central bank yesterday disclosed the results of its most recent auction - the eighth since the program started in December - where commercial banks bid to get a slice of $50 billion in short-term loans.

It's part of an ongoing effort by the central bank to provide relief to a spreading credit crunch that has unnerved financial markets. The situation threatens to push the country into a deep recession.

In the most recent auction, commercial banks paid an interest rate of 2.615 percent, the lowest rate for any of the auctions of this kind conducted so far.

There were 88 bidders for the latest slice of the $50 billion in 28-day loans. Demand was high. The Fed received bids for $88.9 billion worth of loans.

The Fed, around the middle of December, said it was creating an auction program that would give banks a new way to get short-term loans from the central bank and to help them over the credit hump.

A global credit crisis has made banks reluctant to lend to each other, which has crimped lending to individuals and businesses.

The smooth flow of credit is the economy's life blood.

It permits people to finance big-ticket purchases, such as homes and cars, and helps businesses to expand operations and hire workers.

The ill effects of housing and credit problems, however, have made both people and businesses more cautious in their spending. And that has significantly weakened the overall economy.

A growing number of economists believe the economy contracted in the January-to-March period and is on pace for its first recession since 2001.

Across the Atlantic, European banks hungry for more cash received an additional $77.1 billion in short-term credit from the European Central Bank yesterday as part of weekly operations.

The bank has jurisdiction over the 15 nations that use the euro as its currency.

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