Tuesday, February 19, 2008

Stealth Bank Loans from the Fed

By mid-February, the Federal Reserve Bank distributed nearly $50 billion in stealth loans to U.S. banks. Under the Term Auction Facility, banks bid on the relatively low cost credit, which they then have for a month. Some analysts worry about the secret nature of the loans while others view bank's growing reliance on government assistance as problematic.

Meanwhile, the chair of the Minneapolis Fed is comparing 2008 to the 1991 recession, which lasted quite some time. His comments included:

The slumping U.S. economy is reminiscent of the aftermath of the 1991 recession, according to the head of the Minneapolis Federal Reserve. In a speech given Friday morning in Minneapolis, Gary Stern, the regional Fed president, said the current excesses in residential construction, housing market decline, and credit crunch all resemble the "headwinds" environment that prevailed 17 years ago.

"While such an environment will not be permanent, it could well persist for an extended period," said Stern. "If credit is in fact restricted by some institutions and in some markets, it will likely take time for potential borrowers to find alternatives and substitutes."

Well, what are those banks doing with that nearly $50 billion in secret loans?