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Injecting Money Into the Market

Sep 6, 2007
Unless you have spent the past couple of months hiding away in a cave, you are aware that a huge number of home mortgage loans have ended up in default and even in foreclosure. Indeed, some states in the country are experiencing a record rate of mortgage foreclosure filings. In addition to problems associated with credit and lending, the stock market has been a bit bearish itself. The combination of these two factors has caused a significant amount of concern amongst economic, financial and fiscal experts and consumers.

The Federal Reserve actually has been rather proactive in working to ensure that the problems do not have any more adverse effect on the banking industry and by extension on business owners and consumers across the country. In this regard, the Federal Reserve actually has pumped nearly $80 billion into the banking system during two weeks in August.

Understanding what actions the Federal Reserve has taken, you may be wondering and why this helps the banking industry and how it will also have a positive effect on businesses and consumers alike. In order to understand the benefits of what the Federal Reserve has done this month, it's important to have at least a basic understanding of banking regulations and practices in the United States.

The primary regulation that you need to understand is that banks in this country are required by law to maintain at least 20% of their deposits in cash. Because of this requirement, at the end of each banking day, if a bank does not have the necessary amount of deposits in cash, the bank itself must borrow money from other banks. This type of borrowing needs to take place to ensure that the bank has an appropriate cash deposit balance at all times.

The amount of interest that is charged on these types of inter-bank loans is known in the industry as the overnight lending rate. Absent the infusion of money references a moment ago that was undertaken by the Federal Reserve, the amount of money available to banks to ensure their cash deposit balances would have been tighter resulting in higher interest rates that the banks would have to pay to obtain the cash they needed to ensure proper maintenance of their cash deposit balances.

Had this tightening occurred, banks would then have to cover their own reserves by cutting back on the money they otherwise would make available for lending purposes to businesses and consumers alike. The net effect of that would have been an even more significant impact on the economy overall beyond what has already occurred due to the mortgage foreclosure and stock market uncertainty related issues.

In the end, the actions of the Federal Reserve in this instance does appear to have the desired effect of avoiding a further restriction of the amount of money available for lending purposes to both businesses and consumers alike. Moreover, this has helped to hold off even more serious economic problems at the present time and into the more foreseeable future as well.
About the Author
Lance Mohr is your Tampa real estate expert, with over 10 years of experience in real estate sales and 18 years of investing. He holds a real estate broker license in the state of Florida, and is a member of top relocation firms. Lance can be reached at lance@lancemohr.com. Please visit http://www.tampa2enjoy.com and add http://www.tampa2enjoys.com/blog to your favorites section of your browser.
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