Saturday, August 25, 2007

The Credit Lending Crisis

This is a good indication of how serious the credit lending crisis is.

AMERICA's four biggest banks have announced they have each borrowed $US500 million ($613 million) from the Federal Reserve, taking an unusual step to ease the credit squeeze that has been rattling the financial system for weeks.

The banks - Citigroup, Bank of America, JPMorganChase and Wachovia - said on Wednesday that they had tapped the so-called discount window of the Federal Reserve Bank of New York, five days after the central bank lowered the rate and loosened its collateral requirements in an effort to inject more money into the credit markets.

The Federal Reserve cut the interest rate, it charge to banks, from 6.25 to 5.75. The banks helped created this problem by spending $300 billion in online advertising to sell mortgages. They sold mortgages to many people whom shouldn't have been approved. Noble Prize-winning economist Edmund Phelp commented on the lack of oversight.

"It seems to me that markets were not equipped with the adequate new instruments, the necessary institutions to administer these new credit markets."

What made matters worse is the housing market bubble finally popped. The top 5 U.S. homebuilders lost $1.85 billion in the third quarter.

In other news: President Bush said the economy is "strong."

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