The Federal government has launched a multipronged move aimed at loosening credit markets. Under the plan, announced on Oct. 14, the Treasury Dept. will inject a total of $250 billion into banks in exchange for equity stakes. The Federal Deposit Insurance Corp. will temporarily insure non-interest-bearing transaction accounts, such as companies’ payroll accounts, with no ceiling. In addition, the Federal Reserve will develop a program to become, in President Bush’s words, “a buyer of last resort for commercial paper.”
Construction industry officials reacted with hope and skepticism. “I think this will help, but not immediately,” says Anirban Basu, Associated Builders and Contractors’ chief economist. Given the magnitude of banks’ liabilities, Basu believes “it will take some time and perhaps more money before the wheels of capitalism roll again.”
Mel Burges, chief financial officer of Harcon Inc., an Atlanta concrete formwork subcontractor, says the new federal actions are “definitely going to be a benefit to boosting the confidence of the financial markets to ease some of that credit.”
E. Christopher Zaucha, vice president with Innovative Glazing Systems Inc., Lansdale, Pa., says his firm typically has a non-interest-bearing general checking account, and having FDIC remove the $250,000 limit for insuring such accounts “definitely gives me greater peace of mind.”
In drawing the $250 billion, Treasury officials cited authority contained in the new Emergency Economic Stabilization Act. Half of that sum will go to nine large banks.
Treasury Secretary Henry M. Paulson Jr. says, “The needs of our economy require that our financial institutions not take this new capital to hoard it but to deploy it.” But some are skeptical that banks will follow Paulson’s urging to boost lending.
Basu says even with the federal funds, “banks are still likely to restrain lending activities because their outlook for the Main Street economy has become so dire. The last thing bankers want to do is to aggressively lend during a recessionary period that is likely to become worse before it gets better.”