Federal Reserve, Foreign Banks Provide Billions In Cash To Fight Liquidity Crisis

September 29, 2008 11:09 p.m. EST

Washington, D.C. (AHN) - With the American public focused on the $700 billion rescue plan, the Federal Reserve took action in tandem with foreign central banks to provide billions worth of short term liquidity to financial institutions in an effort to loosen up the sputtering credit markets.

The bank failures started to mount on Monday, with Wachovia selling the majority of its assets to Citigroup along with European banks Fortis and Bradford & Bingley either being nationalized or bailed out, foreign banking officials came together with the Fed to provide billions in cash.

The move is designed to free up the credit markets and get the banks to begin lending to each other again. The thought behind the move is if enough short term cash is supplied than the banks will feel comfortable lending to each other as well as businesses.

Businesses need credit in order to conduct business, whether it is to finance large product purchases before the holiday season or purchase a piece of equipment needed to provide a service. With the credit markets clogged up these everyday practices are becoming a difficult task.

The capital was provided Monday morning before the House of Representatives shot down the bank rescue plan.

The centerpiece of the bank rescue plan was a $700 billion fund which would purchase the distressed mortgage assets on the balance sheets of troubled banks. By removing these assets off their books, banks would have better capital positions and liquidity, thus enabling them to provide loans to businesses and consumers.