Help is on the Way: Central Banks Rally to Stabalize the Credit Market

Aug. 10 (Bloomberg) -- Central banks in the U.S., Europe, Japan and Australia added at least $131.3 billion to the banking system in an attempt to avert a crisis of confidence in global credit markets

More than just a housing crisis, the sub-prime fallout threatened worldwide economies as confidence faltered and stock market funds plummeted. Monday mortgage lenders seemed to be over-reacting as many companies stopped taking new applications and others failed to honor existing commitments. Major lending sources recoiled in fear of uncertain futures. Now the central banks are uniting to inject money back into the banking system. This major act is designed to help stabilize the market and soften the risk for mortgage-backed debt.

In the U.S., the federal funds rate opened at 6 percent, the highest in six years. The rate fell to 5.25 percent after the New York Fed bought $19 billion of mortgage-backed securities and then followed up with $16 billion of funds in a second operation.

'Unlimited' Ability

"The Fed has almost unlimited ability to supply liquidity if they feel that is appropriate,'' Rivlin said. She noted that it was "symbolic'' that the New York Fed's first operation today involved mortgage-backed debt -- the type of securities that investors are unloading.