Shortest Term Loans Not Eligible For Plan According To FDIC
December 28, 2008
According to recent reports, members of the Federal Deposit Insurance Corp (FDIC) have already begun to suggest that shortest-term loans will not be included in the proposed $1.4 trillion debt-insurance program.
By excluding loans that have maturation lengths of a month or less, which include overnight interbank loans at a rate specified by the US Federal Reserve, would be a means to aid the Fed in its efforts to avoid further damage to the central interest rate for the nation. By focusing such efforts, it will be more possible to limit the effects of what are largely unpredictable swings in the rate.
Reports also state that the chairman of the FDIC, Sheila Bair, as well as other board members, have already voted on the scheme of regulations that will manage the plan.
The failure of Federal Reserve to maintain the target level of the federal funds rate on the last two months has resulted from the staggering $1 trillion of loans overwhelming the national banking system.
Under the auspices of the FDIC’s original damage control proposal, the fees that were required to insurance the debt led to widespread complaints among many investors that the presence of fees would lead to a collapse in the overnight loan market, a loss of $250 billion caused by fleeing investment funds.
The original FDIC proposal was further derided by companies such as Bank of America and JPMorgan Chase & Co. Representatives from both companies suggested that the proposal was a genuine threat to the overnight federal funds market because it would make them too costly to maintain when compared to alternatives, such as direct loans from the Federal Reserve.
Speculation continues to abound regarding different aspect of this latest proposal. With so many aspects of the economy on shaky ground, many people are apprehensive about any major moves or changes in policies. The consequences for a wrong policy direction could be disastrous.
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