Personal Finance Advice

The current global credit crisis has forced the Fed to take broad action in an attempt to cure the malaise that has infected the entire banking system. The situation has become so bad that they truly have become the “lender of last resort”.

With financial institutions growing increasingly unwilling to loan to each other as credit conditions worsen, the Fed has had to step in and open up it’s lending window to more and more non-traditional banks. They have also decided to lower the interest rates to match what they charge regular commercial banks.

As well as expanding it’s lending facilities and increasing the maturity duration, the Fed has also agreed to take on a broader range of assets as collateral. The most important may be it’s decision to accept mortgage backed securities in an effort to provide liquidity in a market that for most part no longer exists.

Earlier this week it agreed to provide $30 billion in financing for JPMorgan’s takeover bid of the nearly collapsed Bear Stearns at $2 a share, agreeing to accept as collateral some of Bear’s least liquid assets. The Fed hasn’t had to provide credit to a securities firm in such a way since the Great Depression.

With the prospect of a prolonged economic downturn ahead, it is vitally important that the financial system is stabilized. The housing slump may be the root of the current economic troubles but no such recovery in that market can start until the credit starts to flow freely again.

As it has become increasingly difficult to find investments with positive gains, municipal bonds have begun to surge to the forefront. The yields on muni’s have become comparatively attractive in recent months due to a number of factors.

Although a shaky stock market tends to have investors fleeing into the warm embrace of the bond market, things are a little different this time around. The bond market is having it’s own little crisis at the moment.

Bond insurers are reeling from the fallout of the sub prime mortgage collapse with many firms in that industry having lost or are in danger of losing their AAA ratings. This has in turn added an aspect of volatility to a normally placid market.

This added uncertainty along with renewed fears of inflation, due to the Fed’s recent aggressive moves, have sent bond prices falling recently and yields up. These higher yields coupled with their tax free status have led many financial analysts to extol their virtues.

If anything, the recent troubles in the bond market have made muni’s even more attractive. While the short term risk has grown considerably, the long term risks are negligible.

This is due to the fact that historically, muni’s have a miniscule default rate, less than 0.01%. Even non AAA rated muni bonds have a lower default rate than their AAA rated coporate counterparts. As a long term investment, it’s one of the safest bets around.

President Bush has unveiled a $140 Billion economic stimulus package in attempt to forestall an economic downturn. However Wall Street reacted negatively to the news as stocks fell sharply.

Many investment analysts criticized the move as being to small to have any appreciable affect in the short run. Some also believe that when it finally does take effect the economy may already be in a recession.

The economy has been plagued by the triple whammy of a slumping housing market, tight credit market, and soaring energy and commodity prices. A weak holiday season has also renewed fears that consumer spending is falling.

Many investors are calling for the Federal Reserve to do more and believe that it is monetary policy rather than fiscal policy that will determine the fate of the economy. It is believed that rates must fall by at least another full percent in the upcoming months.

This may not keep the country out of recession but it may shorten the recovery time immeasurably. While the economy has been quite resilient thus far amidst the gloomy news in recent months, many feel that it won’t last much longer.