November 26, 2008, 6:00 am

Money falling from the sky?

by: The Financial Blogger    Category: Investment, Market and Risk
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Is it me or does it sound like every day more money is being given out by the US Government (as well as other main central banks) to try to buy themselves out of this big problem. A few years ago, now Fed chairman Ben Bernanke said in a speech one way to combat deflation would be to throw money out of helicopters. Metaphore? Yes of course. But it sure looks like what is happening right now.

Although deflation is not the main worry but rather a major worldwide recession, the banks are trying to use active measures in very aggressive ways to avoid the worst of the after effects of the subprime collapse as well as the US housing collapse.

The Fed had made major headlines asking for $700 billions a few weeks ago for the TARP fund in order to unfreeze borrowing nationwide. With over half of the funds still unused, the strategy is now questioned by all, even by the FED. So today, the Fed took additional measures, announcing a new plan that could use up to $800 billions!!

Of that amount, for the first time, a portion (25%) is geared towards the US consumer to support them as well as small businesses that are suffering from the liquidity squeeze.

Oh and if you missed this weekend’s latest rescue, the US government is going to “bail out” Citigroup, the flagship of the US banking sector as its share price went under 4$ and it was in major trouble as creditors started getting worried. Was it the right decision? Absolutely. If the failure of Lehman brothers is now being marked as a tipping point by some because of its effects on the stability of the entire system, it seems clear that letting Citi fail never could have been even considered possible.

But the problem is what’s next? GM, Ford and Chrysler are all asking for money and the problem is spreading throughout the economy. At what point does the government say no?

While there is no such situation right now, there are some specialists who have started to look at how far the Fed and the US government can go. As long as the market believes they can get their money back, the spending limits are very very high. But like everything else, there are limits and with the Obama administration now getting ready to take on, the situation has not been worse since probably the 1929 depression….

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