Can the Fed Stop a Bank Run?

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The Fed Reserve, in a desperate action this morning to stop a bank run and preserve commercial liquidity, is pouring money into short term markets. As the AP reported an hour ago:

The US Federal Reserve opened up its coffers Tuesday to companies hit by the credit crunch with a new program that will buy up commercial paper, short-term debt critical for many corporate operations.

The latest effort in an all-out war against the credit crunch creates a new “liquidity backstop” for corporate finance and was established after the US Treasury determined it was “necessary to prevent substantial disruptions to the financial markets and the economy,” the central bank said.

“Substantial disruptions to the economy” is a nice way of saying that without access to commercial paper, commerce in the the United States would grind to a halt.

Two days ago, Nouriel Roubini, the respected NYU economics professor, market expert, and editor of the RGE Monitor, had already made these urgent recommendations to stop a liquidity run. In an October 5 interview with the Council on Foreign Relations, Roubini advised the following moves:

* Coordinated interest rate cuts by all major world economies;
* A move by the Federal Reserve to guarantee that it will provide liquidity in the event of any major bank run;
* Increased Fed action to provide short-term liquidity to non-bank actors that lend to corporations;
* A willingness to make short-term loans directly to corporations.

Roubini said that the $700 billion bailout package enacted by Congress last week probably won’t end the crisis of confidence in the financial markets. He notes that the plan does not address the “much more urgent problem” of a “generalized run on the short-term liabilities both of the banks, of the non-bank shadow system, and now of the corporate sector.”

Read the full interview here.

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DEMOCRACY DOES NOT EXIST...

without free and fair elections, a vigorous free press, and engaged citizens to reclaim power from those who abuse it.

In this election year unlike any other—against a backdrop of a pandemic, an economic crisis, racial reckoning, and so much daily crazy—Mother Jones' journalism is driven by one simple question: Will America will move closer to, or further from, justice and equity in the years to come?

If you're able to, please join us in this mission with a donation today. Our reporting right now is focused on voting rights and election security, corruption, disinformation, racial and gender equity, and the climate crisis. We can’t do it without the support of readers like you, and we need to give it everything we've got between now and November. Thank you.

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