The Federal Reserve, working to combat the effects of a severe credit crunch, announced Friday it had auctioned another $20 billion in funds to commercial banks at an interest rate of 4.67 percent. Fed officials pledged to continue with the auctions "for as long as necessary."

The central bank said it had received bids for $57.7 billion worth of loans, nearly three times the amount being offered, indicating continued strong interest in the Fed's new approach to providing money to cash-strapped banks.

It was the second of four scheduled auctions. The first auction, on Monday, of $20 billion resulted in loans being awarded at an interest rate of 4.65 percent. There were 93 bidders seeking $63.6 billion at the first auction and 73 at the second.

Two more auctions will occur in early January. In a statement Friday, the central bank said it would continue with further auctions "for as long as necessary to address elevated pressures in short-term funding markets."

The new auction process was announced by the Fed last week in a coordinated action with central banks around the world trying to address a global credit crunch.

Federal Reserve Chairman Ben Bernanke and his colleagues decided to try the new process because their efforts to inject funds into the banking system through the Fed's discount window, which makes direct loans to banks, had proven less successful than Fed officials had hoped.

Many banks had avoided using the Fed's discount window out of concern that investors would see the move as an indication of underlying problems at their financial institutions.

The auction process was developed as a second way to get money into the banking system with the hopes that it would not carry the stigma of the discount window.

The Fed said Friday that it would announce on Jan. 4 the sizes of the next two auctions which will be held Jan. 14 and Jan. 28. Officials have said the Fed will evaluate the interest in the auctions after the initial four and determine whether more auctions will be scheduled.

The global credit crisis has made banks reluctant to lend to each other even as the Fed has been lowering its federal funds rate, the interest that banks charge each other for overnight loans.

The rate currently stands at 4.25 percent, a full percentage point lower than it was in September when the Fed began slashing rates in the wake of a severe credit squeeze that had roiled global markets in August.

The 4.67 percent rate for the second $20 billion in funds and the 4.65 percent rate for the first auction means that banks who are using the auction process to get needed reserves are getting them at a rate slightly below the 4.75 percent rate they could get in direct loans through the discount window.

The Fed cut the federal funds rate and the discount rate by a quarter-point at its last meeting on Dec. 11, disappointing investors who had hoped for a bigger half-point reduction in the funds rate.

Many economists believe the Fed will keep cutting rates with three more quarter-point reductions expected in the funds rate at the Fed's first three meetings of the new year.

Analysts believe that a serious slowdown in overall economic growth will force the Fed to continue cutting rates even though some Fed officials have expressed worries that the rate cuts could exacerbate inflation pressures, which have flared up again, reflecting a renewed surge in oil prices.

Federal Reserve Will Hold Money Auctions for Banks

Wednesday, the Federal Reserve announced a new approach to help increase liquidity in the U.S. financial system. Through a temporary “term auction facility” (TAF), banks can borrow from the Fed for a one-month term at a below-discount rate, set by market auction.

How Does the TAF Work?

Starting this week, through the TAF, the Fed will make $20 billion available for banks to borrow at auction, and banks will essentially bid against one another to borrow the funds. Banks submit a bid with the amount they want to borrow and what interest rate they will pay; the bid at the highest interest rate will win. A minimum bid will be established at the projected fed funds rate over the month term period, which is lower than the discount rate. To borrow, banks must provide collateral equal to the loan value. The Fed plans to hold two of these unprecedented auctions in December and two more in January.

What is the Fed’s Goal in Offering the TAF?

Concerned about the potential of exposing themselves to bad, subprime mortgage debt, banks are reluctant to lend to one another. The Fed has dropped its discount rate (the rate it charges banks to borrow funds) and extended terms from overnight to 30 days. Yet some banks are still averse to borrowing through the discount window, worried that doing so will send out negative signals about their liquidity and financial stability. With the TAF, the Fed is hoping banks will not feel the same stigma, since the interest rate is set by the market when banks bid against one another for the funds.

What Does That Mean for New Home Buyers and Borrowers?

If the TAF encourages banks to borrow, more liquidity in the pipeline could help to bring down bank lending rates, including mortgage interest rates. The overall goal for the TAF is to increase the flow of money in the banking system and reduce the cost of borrowing. If banks lend, rather than sit on their coffers it would: 1) make more money available to consumers; 2) provide more support to the housing and mortgage industries; and 3) encourage business investment - all points that could help to avert recession.

The TAF is just one more Fed action aimed at helping to keep our economy growing. With more money available in the banking system, consumers looking to buy new homes may find more affordable home loans and mortgage interest rates.

DIRECTIVE 10-289

“In the name of the general welfare to protect the people’s security, to achieve full equality and total stability, it is decreed for the duration of the national emergency that-

Point One: All workers, wage earners, and employees of any kind whatsoever shall henceforth be attached to their jobs and shall not leave nor be dismissed nor change employment, under penalty of a term in jail. The penalty shall be determined by the Unification Board, such board to be appointed by the Bureau Of Economic Planning and National Resources. All person reaching the age of twenty-one shall report to the Unification Board, which shall assign them to where, in its opinion, their services will best serve the interests of the nation.

Point Two: All industrial, commercial, manufacturing, and business establishments of any nature whatsoever shall henceforth remain in operation, and the owners of such establishments shall not quit, nor leave, nor retire, nor close, sell or transfer their business, under penalty of the nationalization of their establishment and of any or all their property.

Point Three: All patents and copyrights, pertaining to any devices, inventions, formulas, processes, and works of any nature whatsoever, shall be turned over to the nation as a patriotic emergency gift by means of Gift Certificates to be signed voluntarily by the owners of all such patents and copyrights. The Unification Board shall then license the use of such patents and copyrights to all applicants, equally and without discrimination, for the purpose of elimination monopolistic practices, discarding obsolete products and making the best available to the whole nation. No trademarks, brand names, or copyrighted titles shall be used. Every formerly patented product shall be known by a new name and sold by all manufacturers under the same name, such name to be selected by the Unification Board. All private trademarks and brand names are hereby abolished.

Point Four: No new devices, inventions, products, or goods of any nature whatsoever, not now on the market, shall be produced, invented, manufactured or sold after the date of this directive, The Office of patents and Copyrights is hereby suspended. (Added later in chapter: All “research departments, experimental laboratories, scientific foundations” will be closed except for government-operated facilities.)

Point Five: Every establishment, concern, corporation or person engaged in production of any nature whatsoever shall henceforth produce the same amount of goods per year as is, they or he produced during the Basic Year, no more or no less. The year is to known as the Basic or Yardstick Year is to be the year ending on the date of this directive. Over or under production shall be fined, such fines to be determined by the Unification board.

Point Six: Every person of any age, sex, class or income, shall henceforth spend the same amount of money on the purchase of goods per year as he or she spent during the Basic Year, no more and no less. Over or under purchasing shall be fined, such fines to be determined by the Unification Board.

Point Seven: All wages, prices, salaries, dividends, profits, interest rates and forms of income of any nature whatsoever, shall be frozen at their present figures, as of the date of this directive. (But taxes will be allowed to increase as needed for the public good)

Point Eight: All cases arising from and rules not specifically provided for in this directive, shall be settled and determined by the Unification Board, whose decisions shall be final.

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