US Central Bank Takes Action to Fix Credit Crisis, Calm Markets | Voice of America - English
The U.S. central bank took another step Friday to try and ease the worries about credit that have sparked a global financial crisis and sharp drops in global stock prices.
The Federal Reserve cut the interest rate on loans it makes to banks by half a percent (from 6.25 percent to 5.75 percent). That makes it easier for banks to borrow money, which in turn makes it easier for them to lend money to businesses, potential homebuyers, and others. The Fed intended to ease investor fears that a credit crisis could hurt economic growth and profits. The Fed action encouraged investors, and U.S. and European stock market indexes soared in Friday's trading. The chief global economist for Decision Economics, Allen Sinai, says the central bank was wise to take action before the economic crisis worsened and became more difficult to correct. "They did this before the data turned sour," he said. "That is very good because the Fed is on the case, they are on the job, they are alert to the fact that what is going on with the supply of credit and liquidity could take down the economy." The Fed did not cut the main U.S. interest rate, known as the Federal Funds rate, which affects the rates charged throughout the economy. But Sinai says the central bank has given a strong signal it will take more action, perhaps including an interest rate cut, if needed. Before the U.S. central bank acted, global stock prices were falling dramatically. In Friday trading, Tokyo's Nikkei index plunged more than five percent, South Korea's KOSPI was off three percent, Hong Kong's Hang Seng fell as much as five percent before recovering somewhat and was down around one and a half percent at the close. China's Shanghai Composite index ended more than two percent lower. Central banks around the world, including the Fed, the Bank of Japan, and the European Central Bank, had already tried to ease the credit crisis by injecting billions of dollars into the banking system over the past few days. The president of Delphi Management, Scott Black, says the central banks are taking this crisis seriously. "And there is a fear that there may be a recession on the horizon if they do not act in the not too distant future," he said. Black and Sinai spoke to the Bloomberg financial news service. Fear of a credit crunch grew out of the collapse of some securities based on sub-prime home loans. Those are loans given to people with poor credit and generally carry a higher interest rate to make up for the risk of default. Many financial institutions gathered up thousands of mortgages, including sub-prime loans, and bundled them into securities backed by repayments, using the properties as security. A downturn in the housing market meant many people could no longer repay those loans, and some lenders went bankrupt or said they could no longer issue loans. That worried remaining lenders, who became so cautious that they avoided making new loans. That meant businesses and homebuyers, including some who were credit-worthy, could not borrow the money they needed to make purchases or buy equipment for businesses. Investors were concerned that a lack of financing would stall or even shrink the economy.