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Fed to buy massive amounts of short-term debt

(Agencies)
Updated: 2008-10-07 23:39

WASHINGTON - The Federal Reserve announced Tuesday a radical plan to buy massive amounts of short-term debts in a dramatic effort to break through a credit clog that is imperiling the economy.

Chairman of the Federal Reserve Ben Bernanke testifies before the Joint Economic Committee about the credit market turmoil and the government economic bailout on Capitol Hill in Washington September 24, 2008. [Agencies]

The Federal Reserve, invoking Depression-era power under "unusual and exigent circumstances," will buy "commercial paper," a short-term financing mechanism that many companies rely on to finance their day-to-day operations, such as purchasing supplies or making payrolls.

Related readings:  Fed may lend to Main Street as Wall Street crisis widens  Fed eyes plan to fund short-term business loans  Bailout points finger at Fed's previous move  Fed officials considering further rate cuts: report

The $99.4 billion daily market for this crucial financing, which relies on investors rather than banks, has virtually dried up. Most investors have become too jittery to buy paper for longer than overnight or a couple days.

That has made it increasingly difficult and expensive for companies to raise money to fund their operations. Commercial paper is a way of borrowing money for short periods, typically ranging from overnight to less than a week.

The unstable situation has left many companies vulnerable. The notion under the plan is for the government to provide a "backstop" that would give companies a new place to get cash, the Fed said. The action makes the Fed a source of credit for nonfinancial businesses in addition to commercial banks and investment firms.

The Fed's action helped lift investors' spirits. The Dow Jones industrials rose 145 points in early trading, a day after a huge selloff put the Dow below 10,000 for the first time in four years.

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