Can the Fed Stop a Bank Run?

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The Fed Reserve, in a desperate action this morning to stop a bank run and preserve commercial liquidity, is pouring money into short term markets. As the AP reported an hour ago:

The US Federal Reserve opened up its coffers Tuesday to companies hit by the credit crunch with a new program that will buy up commercial paper, short-term debt critical for many corporate operations.

The latest effort in an all-out war against the credit crunch creates a new “liquidity backstop” for corporate finance and was established after the US Treasury determined it was “necessary to prevent substantial disruptions to the financial markets and the economy,” the central bank said.

“Substantial disruptions to the economy” is a nice way of saying that without access to commercial paper, commerce in the the United States would grind to a halt.

Two days ago, Nouriel Roubini, the respected NYU economics professor, market expert, and editor of the RGE Monitor, had already made these urgent recommendations to stop a liquidity run. In an October 5 interview with the Council on Foreign Relations, Roubini advised the following moves:

* Coordinated interest rate cuts by all major world economies;
* A move by the Federal Reserve to guarantee that it will provide liquidity in the event of any major bank run;
* Increased Fed action to provide short-term liquidity to non-bank actors that lend to corporations;
* A willingness to make short-term loans directly to corporations.

Roubini said that the $700 billion bailout package enacted by Congress last week probably won’t end the crisis of confidence in the financial markets. He notes that the plan does not address the “much more urgent problem” of a “generalized run on the short-term liabilities both of the banks, of the non-bank shadow system, and now of the corporate sector.”

Read the full interview here.

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Corrupt leaders the world over can (and will) try to shut down the truth, but when the truth has millions of people on its side, you can't keep it down for good. And there's no more powerful or urgent argument for your support of Mother Jones' journalism right now than that. We need to raise about $450,000 to hit our online fundraising budget in these next few months, so please read more from Monika and pitch in if you can.

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