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Posts Tagged ‘money’

U.S. Treasury Secretary Timothy Geithner announced March 14th, that he will soon be able to provide details of a plan, which it is hoped will help banks clean up their non-performing assets that are still clogging the financial system.

“We’re going to move quickly to lay out a new financing program to deal with these legacy assets. We have and expect to see a lot of support for this program among potential buyers of the assets. The Treasury already is well on its way to starting a dramatic lending program to help securities markets get flowing again. Regulators will ensure banks have a backstop of capital to make sure they can do what’s necessary to restore lending”.

Geithner’s program apparently has three main components;

1. It will inject government capital into some of the country’s biggest financial institutions.

2. A public-private partnership to handle as much as $1 trillion of banks’ bad assets will be setup.

3. A credit facility with the Federal Reserve of as much as $1 trillion to promote lending to consumers and businesses will be put in place.

The Treasury’s intention is to unfreeze the credit markets by providing new incentives to banks and investors, which will hopefully encourage them to resume trading in mortgage securities and other troubled assets.

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Recently released Federal Reserve figures show that household wealth fell by a record $5.1 trillion in the period October to December 2008, which was almost twice as much as the decrease in the previous quarter.

According to the Federal Reserve’s quarterly Flow of Funds report that was released March 12, 2009, the net worth of households and non-profit groups dropped to $51.5 trillion from $56.6 trillion in the third quarter of last year, making it the lowest level for four years.

Household net worth fell in five successive quarters creating a loss of $12.8 trillion during that period, and the decline comes close to equaling the total size of the U.S. economy, which stood at $14.2 trillion in the last three months of 2008.

America’s overall wealth declined by $11.2 trillion in 2008 from the previous year, which is the biggest annual decrease since the government began keeping its quarterly records in 1952.

Total borrowing by consumers, businesses and government agencies rose to an annual rate of 6.3% during last quarter, compared with an 8.1% rise during the prior quarter, and the gain was led by a 37% increase in borrowing by the federal government, and borrowing by state and local governments rose at a 1.2% rate.

The amount borrowed by businesses climbed at an annual pace of 1.7% after having risen 4.1% during the previous quarter.

Additional figures that were just released by the Commerce Department indicate that purchases dropped at a 4.3% annual rate between October and December after falling by 3.8% during the previous three months. The decline, which was led by the biggest drop in consumer spending in three decades caused the U.S. economy to shrink at a 6.2% annual rate during the last quarter of 2008.

Debt dropped at a 2% annual rate, which was the first decrease on record, and mortgage borrowing fell at a 1.6% annual rate following a drop of 2.3% the previous quarter.

Many analysts expect people to hunker down, and to attempt to save more in the coming months which will further restrain spending and economic growth.

Jonathan Basile, who is an economist at Credit Suisse Holdings USA Inc. in New York opined, “I don’t think it’s any surprise that wealth has declined so much, given the bad news out of markets and house prices. This decline in wealth is a headwind for spending and it’s a big reason to be cautious and to save”, and Sal Guatieri, who is a senior economist at BMO Capital Markets in Toronto, said, “Evaporating wealth and forced savings, coupled with rampant job losses, suggest consumers will continue to hibernate”.

President Barack Obama’s administration is attempting to revive an economy that’s in its second year of recession, by way of a $787 billion stimulus package that was signed into law last month, but recent reports indicate however, that consumer spending hasn’t yet begun a sustained recovery, in spite of slightly better than projected results for the first two months of the year.

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