Fed hoarding credit risk

Stocks rally as Fed boosts lending


The Fed has committed up to $800 billion in an attempt to unfreeze credit markets for homebuyers, small businesses and consumers. The increasing threat of deflation is calling for some unusual measure to be put in place, including buying up $600 billion in debt issued or backed by government-chartered housing-finance companies and establish a $200 billion support programme for consumers and small businesses. The Fed said in its statement that "This action is being taken to reduce the cost and increase the availability of credit for the purchase of houses, which in turn should support housing markets and foster improved conditions in financial markets more generally".

Economists have responded with criticisms, as the lending programme is devised to ease lending practices for consumers who are not sure if they want to take on more debt. The ever-sinking property market combined with low stock values isn't enticing consumers to spend. In spite of this, the Fed is pressuring banks to increase lending - even though they fear the loans will not be paid back. The Fed, on the other hand, is taking on increasing amounts of debt - and piling on the credit risk. Much lies on the ratings of asset-backed securities which the Fed is taking on with the taxpayers money: it is becoming increasingly difficult to assess where the underlying assets' value will be in a few years time. Even though Hank Paulson seems convinced that they are “a great investment for the taxpayer", many taxpayers might feel more sceptical banking on assets that got them into this mess in the first place.