While offering more than $3 trillion in loans and asset purchases within a few recent weeks to help the economy to ride with the economic impact of the coronavirus pandemic, the Federal Reserve of the United States has not provided any direct help to the top large parts of the economy comprising of companies, municipalities and other borrowers that do not have good credit history.
Part of this reason is that the American central bank is legally not permitted to take on much credit risk itself and loans given out to borrowers with less than perfect credit rating have chances of losses. Such risks are further exacerbated by the attempts to prevent the spread of the coronavirus pandemic in the country as well as its impact on the economic activities of the country that have been brought to a complete halt.
Instead of the Fed, the higher risk debts have been taken on by the Treasury Department of the US while assuming that some of the loans will not be paid back in total.
The Treasury Department has contributed a total of about $50 billion from a fund called the Exchange Stabilization Fund and the money thus released is planned to be utilized to mitigate some of the losses to the Fed if some of its loans go bad. And this has helped the Fed to lend out more money while exposing itself to less risks assuming that only a fraction of the loans it distributes will go bad.
The US Treasury Department was given access to an additional $450 billion by the Congress as part of the record $2.2 trillion stimulus package.
However, even that additional money may not be sufficient, said investors and economists and have claimed that Congress will likely need to pump in trillions of dollars more to empower the Fed and the Treasury department to enable to make any serious impact on the American economy. But if that does not happen, many companies and local governments of the country will carry be facing the risk of defaulting on debt or even shutting shop completely.
This situation has been attributed to the gigantic size of the American economy – the largest in the world, the never before seen impact on the country’s economy due to the coronavirus pandemic as well as the threat of higher credit losses in case the government has to spend money to support weaker borrowers, say the experts.
The Treasury Department will require an additional $2 trillion to help prop up the economy, said Scott Minerd, chief investment officer of Guggenheim Partners and a part of an investor committee that gives advice to the New York Federal Reserve on financial markets.
"I think we'll be back at the table with another program before this is over,” Minerd said in an interview.
"You're on your way to have something of a big enough scale to get things propped up", he said referring to the additional $2 trillion that he recommends be given to the Treasury by the government.
The aid package passed last week was the “bare minimum”, said Bank of America analysts in a research note last week. An additional $3 trillion would be required in fiscal stimulus and more the recession of the economy is deeper, he estimated.
(Source:www.channelnewsasia.com)
Part of this reason is that the American central bank is legally not permitted to take on much credit risk itself and loans given out to borrowers with less than perfect credit rating have chances of losses. Such risks are further exacerbated by the attempts to prevent the spread of the coronavirus pandemic in the country as well as its impact on the economic activities of the country that have been brought to a complete halt.
Instead of the Fed, the higher risk debts have been taken on by the Treasury Department of the US while assuming that some of the loans will not be paid back in total.
The Treasury Department has contributed a total of about $50 billion from a fund called the Exchange Stabilization Fund and the money thus released is planned to be utilized to mitigate some of the losses to the Fed if some of its loans go bad. And this has helped the Fed to lend out more money while exposing itself to less risks assuming that only a fraction of the loans it distributes will go bad.
The US Treasury Department was given access to an additional $450 billion by the Congress as part of the record $2.2 trillion stimulus package.
However, even that additional money may not be sufficient, said investors and economists and have claimed that Congress will likely need to pump in trillions of dollars more to empower the Fed and the Treasury department to enable to make any serious impact on the American economy. But if that does not happen, many companies and local governments of the country will carry be facing the risk of defaulting on debt or even shutting shop completely.
This situation has been attributed to the gigantic size of the American economy – the largest in the world, the never before seen impact on the country’s economy due to the coronavirus pandemic as well as the threat of higher credit losses in case the government has to spend money to support weaker borrowers, say the experts.
The Treasury Department will require an additional $2 trillion to help prop up the economy, said Scott Minerd, chief investment officer of Guggenheim Partners and a part of an investor committee that gives advice to the New York Federal Reserve on financial markets.
"I think we'll be back at the table with another program before this is over,” Minerd said in an interview.
"You're on your way to have something of a big enough scale to get things propped up", he said referring to the additional $2 trillion that he recommends be given to the Treasury by the government.
The aid package passed last week was the “bare minimum”, said Bank of America analysts in a research note last week. An additional $3 trillion would be required in fiscal stimulus and more the recession of the economy is deeper, he estimated.
(Source:www.channelnewsasia.com)
