Archive for Wednesday, October 22, 2008

Fed to break up credit logjam

October 22, 2008

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— First, it was the banks. Now the Federal Reserve has come to the aid of money market funds as the government seeks to break the credit logjam that threatens the global economy.

A week after the government announced it would spend $250 billion to buy stakes in U.S. banks, the Fed stepped up Tuesday to help money market funds that have been squeezed by worried investors demanding to cash out their holdings. Meanwhile, the Treasury named two accounting firms to help manage the $700 billion bailout package.

Treasury Secretary Henry Paulson said Tuesday night that the government would do whatever it takes to deal with the credit crisis but he cautioned that economic troubles caused by the crisis are likely to persist "for a number of months."

"Through a multitude of powerful actions we have and will demonstrate our commitment to unlocking our credit markets and minimizing the impact of the current instability on the rest of the U.S. economy," Paulson told a New York audience.

The government is trying to combat the worst credit crisis in seven decades, an upheaval that has destabilized Wall Street and raised fears that the country could tumble into a deep recession.

The Fed said it would provide up to $540 billion in financing to money market mutual funds in a new program called the Money Market Investor Funding Facility.

"The government is doing everything it can to break the logjam," said Mark Zandi, chief economist at Moody's Economy.com. "If these money markets are not working properly, then the economy is significantly threatened because this is where businesses get their short-term financing for their day-to-day operations."

Also Tuesday, the Treasury Department announced that it had selected two major accounting firms to help manage the government's $700 billion rescue program for the financial system.

The department announced that Ernst & Young would receive an initial contract for $492,000 to provide accounting services, and Pricewaterhouse Coopers would get nearly $191,500 to set up internal controls for part of $700 billion program.

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