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Analysis

Where dowe go now?

Daniel Tandy, an executive floor governor of Prime Securities Inc., talks to a fellow trader last week at the New York Stock Exchange. Since last summer, a panicky mind-set has swept over investors.

Associated Press

Daniel Tandy, an executive floor governor of Prime Securities Inc., talks to a fellow trader last week at the New York Stock Exchange. Since last summer, a panicky mind-set has swept over investors.

WASHINGTON — With the quick collapse of the investment bank Bear Stearns, fears are mounting about whether other financial companies may fall, and all eyes are on the Federal Reserve board as it weaves its way through a many-faceted financial crisis. Many believe the country has already sunk into recession and all the problems — if not contained — will deepen and prolong the pain.

"The Fed is on high alert — something you don't see but once every quarter century; maybe, in this case, since the Great Depression. This is a very unusual period," said Mark Zandi, chief economist at Moody's Economy.com.

That's because the Fed is having to fight a housing collapse, a severe credit crunch and Wall Street turmoil that threaten the stability of the U.S. financial system. All those problems feed on one another, creating a vicious cycle that can be hard for the Fed and other Washington policymakers to break. The weight of those troubles is like a millstone on the ailing economy.

"Now the issue is fighting the deeper recession," said Brian Bethune, economist at Global Insight. "It has kind of moved to another level. The fires are spreading," he said.

President Bush declared "we're in challenging times" and huddled Monday with top economic officials — including Fed Chairman Ben Bernanke, Treasury Secretary Henry Paulson and Securities and Exchange Commission Chairman Christopher Cox.

To limit the damage, Bernanke and his colleagues may ratchet down today a key interest rate, now at 3 percent, by as much as a full percentage point, to 2 percent, which would put that rate at the lowest it has been since late 2004.

Because that rate affects a wide range of rates charged to millions of consumers and businesses, it is the Fed's most potent tool for reviving economic activity.

However, with the panicky mind-set that has swept over investors since last summer, credit — even at a lower cost — has become harder to get as financial institutions and others became increasingly wary of business prospects. So the Fed took a series of other unconventional maneuvers to deal with those problems and to restore confidence.

The Fed, in a bold action Sunday, agreed for the first time to let big investment houses get emergency loans directly from the central bank. Also Sunday, the Fed approved a $30-billion credit line to engineer the takeover of Bear Stearns.

Some investors worry Lehman Brothers Holdings Inc. might be next to fall. Lehman — the investment bank considered most similar to Bear Stearns — and other major investment banks are slated this week to report quarterly results.

Lehman fell $7.51, or 19 percent, to close at $31.75 Monday.

The new lending facility — described as a cousin to the Fed's emergency lending "discount window" for banks — is geared to give financially squeezed major investment houses a source of short-term cash on a regular basis.

. fast facts

Rate subtleties

When the Federal Reserve board meets today, it is expected it will reduce a key interest rate — the Federal Funds rate — at least one-half percentage point. The rate, currently at 3 percent, is directly linked to the prime interest rate, which affects consumer borrowing rates. Over the weekend, the Fed's emergency lending rate, which affects banks only, was reduced.

Where dowe go now? 03/17/08 [Last modified: Thursday, October 28, 2010 9:42am]

    

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