Federal Reserve & Interest Rates

Fed chairman Ben Bernanke will have a familiar face to work with when the next administration takes office.  President-elect Barack Obama announced earlier today that the President of the New York Fed, Timothy Geithner, will replace Henry Paulson as the next Secretary of the Treasury.

The selection of Geithner was met with approval on Wall Street as stocks rallied initially before retreating once again at the close of the session.  Since Geithner is already involved with dealing with the current financial mess,  it should make for a much smoother transition than if an outsider was chosen.

Along with dictating how to spend the second half of the $700 rescue package, he will have to work closely with Bernanke in correcting what looks to be a long economic downturn.  We can also expect a flurry of  fiscal policy moves at the turn of the year and it looks as if a new stimulus package will be first on the agenda.   

He will also be responsible for the leading the charge to revamp the regulatory structure of the financial service industry.  It will also be interesting to see how the relationship between government and business continues to develop. 

With the government having an increasing say in how businesses are being run, one wonders if they will go back to the hands off approach once the financial storm passes.  The growing problem of the national debt will also be a major concern as this years record budget deficit may only be the beginning of more to come.

All in all, I don’t think Paulson will mind too much when he relinquishes his mantle in just over a month.

The financial crisis which began last fall has pushed fiscal and monetary policy to the limits.  Government spending has exploded over the past year to the tune of nearly $2 trillion for just the economy alone and if anything it’s been picking up speed lately.

When the Federal Reserve made it’s initial $85 billion loan to AIG it imposed a crippling interest rate which was at 8.5% above LIBOR.  However in conjunction with a new $150 billion aid package to the struggling insurance giant, the Fed has announced new terms to the original agreement.

The Federal Reserve Board and the U.S. Treasury on Monday announced the restructuring of the government’s financial support to the American International Group (AIG) in order to keep the company strong and facilitate its ability to complete its restructuring process successfully. These new measures establish a more durable capital structure, resolve liquidity issues, facilitate AIG’s execution of its plan to sell certain of its businesses in an orderly manner, promote market stability, and protect the interests of the U.S. government and taxpayers. 

It makes sense, the first loan would have ensured an untimely liquidation in order to pay it down as quickly as possible and that wouldn’t help anyone.  But the price tag keeps going up and up.

Banking, insurance and now the auto industry wants in.  GM could very well go belly up and over a million jobs lost if it doesn’t get funding before the year is out.

There appears to be support for a bailout but nothing is ever certain, remember the $700 billion bank rescue plan failed to pass the first time around.  The Treasury also doesn’t appear to be willing to use any of that money for the auto industry so any help will have to come from somewhere else.

Maybe there will be no help for the auto industry, the government is obviously willing to make tough, cold hearted choices when it has to.  AIG got a loan from the Fed the same day Lehman Brothers got the cold shoulder and declared bankruptcy. 

The housing market need serious fixing and huge amounts of money are going to have to be poured into Fannie Mae and Freddie Mac if that’s going to happen.  Americans might also get some relief in the form of a new stimulus package before the next administration even takes office. 

The new government is going to have it’s hands full coping with this financial mess and will most likely be aggressive in tackling the problem at the start and that just means more and more spending but what else can they do.  This has the makings for a long economic downturn and no one knows how long it will last but one thing is certain, the longer it does, the more expensive it will be.

According to employment data released by the Labor Department today, the economy lost jobs once again in October.  This in now the tenth straight month where unemployment has declined, a streak which began in January and which many expect to last for some time.

Nonfarm payroll employment fell by 240,000 in October, and the unemployment rate rose from 6.1 to 6.5 percent, the Bureau of Labor Statistics of the U.S. Department of Labor reported today.  October’s drop in payroll employment followed declines of 127,000 in August and 284,000 in September, as revised. 

Employment has fallen by 1.2 million in the first 10 months of 2008; over half of the decrease has occurred in the past 3 months.  In October, job losses continued in manufacturing, construction, and several service-providing industries.  Health care and mining continued to add jobs.

Some economist are predicting that unemployment will likely rise to at least 8% in the next few months and the financial crisis which intensified last month won’t help matters.  Double digit unemployment isn’t out of the realm of possibility, seeing as how job losses have accelerated the past three months.

The Fed will probably cut interest rates once again after it’s next meeting and Congress will likely pass another stimulus package all in an effort to try to jump start the economy.  The good thing is that energy prices are nearly back to the level they were last fall and a big part of why inflation never got out of control was the soft job market and the lack of wage pressure.

While the economy isn’t officially in a recession just quite yet, it did shrink finally last quarter and it could be the start of the worst economic downturn this country has seen since the 1980’s.  From businesses to investors and consumers, everyone is holding back, it almost seems like the only one spending money these days is the federal government.