Fed Reserve mulls over new proposal for ailing financial sys

The Federal Reserve is considering a new radical plan to jump start the engine of financial system even as stocks around world plummeted on Monday, a media report said today.

Under a proposal being discussed with the Treasury Department, the New York Times said, the Fed could buy vast amounts of the unsecured short-term debt that companies rely on to finance their day-to-day activities.

If this were to happen, the central bank would come closer than ever to lending directly to businesses, it added.

The Fed plan is intended to renew the flow of credit on which the economy depends. Under its plan, the central bank would buy unsecured commercial paper, essentially short-term i.O.U.'s issued by banks, businesses and municipalities.

 

The market for that kind of debt has all but shut down in the last week, with many major corporations unable to borrow for longer than a day at a time, as banks become more fearful of giving out cash.

The volume of such debt totaled about $ 1.6 trillion as on Oct. 1, down 11 per cent from the previous three weeks.

These credit fears persisted over the weekend despite the $700 billion bailout package that Congress approved last week.

While the move would put more taxpayer dollars at risk, the paper said, it underscores the growing sense of urgency felt by policy makers in a climate where lending has virtually dried up.