The Fed pumps $1.2 trillion to the economy

The U.S. central bank would pump $1.2 trillion into economy to combat the worst global slowdown in decades, the Fed announced Wednesday, Mar. 18. The central bank’s plans to buy up to $300 billion long-term government bonds and some $750 billion in mortgage-backed securities, which would help revive the U.S. sagging housing market.

The Fed hasn't set out to influence long-term interest rates by buying long-term bonds since the 1960s.

By buying Treasurys and lifting the size for its programs to buy mortgage-backed securities and agency bonds, the Fed will boost money supply available for borrowing to combat the recession. The moves aims to lower mortgage rates and reduce the premium companies have to pay over the federal government to secure funding from the capital markets. The lower borrowing costs for consumers and companies are expected to prop up demand and spending in the U.S.

The Federal Reserve has been moving toward this quantitative easing policy since mid-September 2008. The policy is essentially required the Fed to print money to put the financial system back on its feet and jump-start the economy. But economists warned that such efforts could lead to long-term inflation, and could drive down the value of the dollar.

The Fed’s Open Market Committee also announced it would keep interest rates near zero, and said it expected its target interest rates to remain exceptionally low “for an extended period.” Interest rates in the U.S., the fed-funds target rate, has been in the range of 0%-0.25%. In all major economies, the interest rates have been pushed to ultra-low levels.

Moments after the Federal Reserve announced its plans, yields on the benchmark 10-year Treasury note posted their biggest drop in years as investors welcomed a big new buyer to the market for government debt. The central bank’s decision to fire up $1.2 trillion continued to sweep over world financial markets on Thursday, pushing the price of government bonds higher and dragging down the value of the dollar.

The Fed’s plan follows similar actions taken by central banks across the globe. The Bank of England is buying government securities, while the Swiss is selling francs to try to push down the value of their currency. The Bank of Japan announced Wednesday that it would also expand its purchase of government debt by almost 30 percent.

The markets are responding favorably to the U.S. Federal Reserve's bold $1.2 trillion spending plan. On Wall Street, stocks advanced on the day, but slipped on the next day. World stock markets were mostly higher the next day, Mar. 19.

The dollar has been sold off aggressively across the board in the wake of the Federal Reserve's decision. The dollar extended its decline against the euro, the yen and other major currencies on Thursday.

U.S. unemployment at 25-year high, 12.5 million people jobless

The U.S. unemployment rate rose to a 25-year high of 8.1 percent in February as employers shed 651,000 jobs in the deepening recession, government data showed on Friday, Mar. 6. A total of 12.5 million people were unemployed in February, the Labor Department said.

February's jobless rate was the highest since December 1983 and was a half percentage point above January's 7.6 percent.

Since the recession started in December 2007, the economy has shed 4.4 million jobs.
Companies struggling with falling revenues and tight profit margins are axing jobs in huge numbers, forcing households to further scale back spending, creating a vicious cycle.

The Obama administration has been rolling out a $787 billion stimulus package to try to break the economy's frightening downward spiral.

Third attempt in bailing out Citigroup

The government will swap the $25 billion in Citigroup’s preferred stock from its earlier bailout money into common stock. The Treasury Department said the swap is contingent on private investors making a similar swap. The deal announced Friday, Feb. 27 represents the third rescue attempt in the past five months for Citigroup, which has been struggling under the weight of losses tied to bad bets on mortgages.

This will boost the taxpayers' stake and risk in the struggling bank from 8 percent to 36 percent. The government's big stake in the common stock means taxpayers will share in future gains or losses in the company's share price. The stock conversion will make the government the largest shareholder in Citigroup

Citigroup said it has offered to swap up to $27.5 billion of its existing preferred stock held by private investors at a conversion price of $3.25 share. The Government of Singapore Investment Corp., Saudi Arabian Prince Alwaleed Bin Talal, Capital Research Global Investors and Capital World Investors are among the private investors that said they would participate in the exchange. The U.S. government will match this exchange up to a maximum of $25 billion face value of its preferred stock at the same conversion price.

The conversion of the government's Citigroup stock will give the bank more capital reserves to withstand mounting losses on its holdings of mortgages and other loans, as well as to survive further economic weakness, satisfy regulators, and eliminate the need to pay dividends. The transaction also frees Citigroup from having to buy back the preferred shares from the government. The preferred shares are similar to debt, and the banks were under pressure to essentially pay back the government in five years.

The arrangement inflames some investors' worries of bank nationalization. They think that this is another step toward creeping nationalization. Federal Reserve Chairman Ben S. Bernanke said Feb. 25 he wants to avoid nationalizing Citigroup and other large banks in a way that would wipe out shareholders and leave the U.S. in full control. Bernanke said the government might end up owning a “substantial minority” of the bank.

Investors were unhappy with the Citigroup deal, sending its shares plummeting 39 percent to a new 52-week low of $1.50 on Friday, Feb 27. The Dow Jones industrials average fell 119 points to 7,063. Sour market reaction was understandable given that the government is taking a bigger role in Citigroup and the shares of common stock are being diluted.

Worst U.S. economic contraction since 1982 in fourth quarter

Just a month ago the U.S. economic contraction measured by gross domestic product for the fourth quarter of 2008 had been estimated at 3.8 percent. Then the Commerce Department revised the GDP contraction to an astonishing 6.2 percent Friday, Feb. 27 on the ground of sharp declines in consumer spending, investment and exports.

Both the new and the old fourth-quarter figures marked the weakest quarterly showing since an annualized drop of 6.4 percent in the first quarter of 1982, when the country was suffering through an intense recession.

For all of 2008, the economy grew just 1.1 percent. That was down from a 2 percent gain in 2007 and marked the slowest growth since the last recession in 2001. GDP, the value of all goods and services produced in the United States, is the best barometer of the country's economic health.

The faster downhill slide came as the worst financial crisis since the 1930s intensified in the final quarter of 2008 following the government rescue of several large financial institutions and the collapse of Lehman Bros. The ensuing credit squeeze has driven consumer and business confidence to generational lows, and cost nearly 2 million Americans their jobs. The nation's jobless rate is now at 7.6 percent, the highest in more than 16 years.

Now in the second year of recession, most economists don't expect GDP to grow until the second half of the year, when the leading edge of the $787 billion fiscal-stimulus plan begins to have an impact.

The recession is expected to stretch at least through the first six months of 2009, as shoppers slash spending in the shadow of hard times at home and aboard. Companies, in turn, are being forced to cut jobs and production while resorting to other cost-saving measures to survive.

Federal Reserve Chairman Ben Bernanke said earlier in the week that he was confident the economy would rebound modestly later this year and into 2010, but only if the government's efforts to stabilize the banking system prove successful.

Highest loan delinquency rate since 1992

Loan delinquency rate of U.S. banks stood at 4.6 percent in the last quarter 2008. That's the highest delinquency rate since 1992 in the aftermath of the savings & loan crisis. The seasonally adjusted delinquency rate rose from 3.7 percent in the third quarter 2008. A year ago, the delinquency rate was 2.4 percent.

The delinquency rate for residential real estate spiked up to a record 6.3 percent in the fourth quarter from 5.2 percent in the third quarter and 3 percent a year earlier. Delinquencies for commercial real estate loans increased to 5.4 percent in the fourth quarter from 4.7 percent in the third, and double the rate a year earlier.

Consumer credit card delinquencies jumped to a record 5.6 percent from 4.8 percent in the third quarter.

Banks charged off a record $35.5 billion in the fourth quarter 2008, up from $24.2 billion in the third quarter and $13.9 billion in the fourth quarter a year earlier. The charge-off rate increased to 1.9 percent from 1.5 percent in the third quarter.

Double bubbles trigger U.S. financial crisis

Current economic mess in America is steamed from and centered in the financial mess, and then spill over to other sectors of economy. This crisis, like most others in rich countries, emerged from double bubbles: property bubble and a credit boom.

House prices doubled only in five years. The scale of the bubble was about as big in America’s ten largest cities as it was in Japan’s metropolises. But nationwide, house prices rose further in America and Britain than they did in Japan. So did commercial-property prices.

In absolute terms, the credit boom on top of the housing bubble was unparalleled. In America private-sector debt soared from $22 trillion (or the equivalent of 222 percent of GDP) in 2000 to $41 trillion (294 percent of GDP) in 2007.

Judged by standard measures of banking distress, such as the amount of non-performing loans, America’s troubles are probably worse than those in any developed-country crash bar Japan’s. A recent estimate by Goldman Sachs suggests that American banks held some $5.7 trillion-worth of loans in “troubled” categories, such as sub-prime mortgages and commercial property. That is equivalent to almost 40 percent of GDP. As a comparison, non-performing loans in Japan they hit 35 percent of GDP at the peak of the crisis, according to the IMF. In Sweden reached 13 percent of GDP.

Today’s financial crash is not just in regulated banking sector. America also faces simultaneous collapse of the shadow banking system, the universe of investment banks and hedge funds responsible for much of the recent securitization boom as well as for the sharp rise in financial leverage.

As a result, standard measures of banking distress, such as the level of non-performing loans, understate the contraction pressure. So far most of the credit collapse in America has come from the demise of securitization. In 2007, for instance, $668 billion of non-traditional mortgages were securitized. Last year that figure dropped to $40 billion. Rapid deleveraging outside traditional banks also means that cleaning up banks’ balance-sheets may not break the spiral that is driving down asset prices and stalling financial markets. Financial-sector debt was the fastest-growing component of private-sector debt in recent years. Many of those excesses are being unwound at warp speed.

$787 billion package to revive U.S. economy

Senators voted to approve a $787 billion economic stimulus package on Friday, Feb. 13 following an earlier vote in the House.

The bill is a mixture of tax cuts, government spending, aid to states, and relief to the unemployed that Obama says will create 3.5 million jobs.

The Senate vote was 60 to 38; three Republicans voted for it.

The House had approved an earlier $825 billion version of the package without any Republican support last week. On Tuesday, Feb. 10, the Senate voted to approve a different $838 billion version with few Republicans opting to back it. The two versions had to be reconciled in a joint House-Senate committee before facing final votes in the two chambers.