For the Federal Reserve and the Treasury Department, it is crunch time.
Without the broad bailout plan they invented and lobbied hard for, the two agencies are once again forced to careen from one crisis to another, and to dig deep into their toolkits to rescue the global financial system. Even before the House stunned the world on Monday by rejecting the Bush administration’s bailout bill, the Fed was already resorting to the oldest action in its book: printing money.
With money markets around the world seizing in fear, the Fed on Monday announced that it would provide an extra $150 billion through an emergency lending program for banks, and an additional $310 billion through so-called swap lines with foreign central banks to help money markets from Europe to Asia.
It was an extraordinary display of financial power, and it reflected acute new anxiety at the Fed and central banks around the world that the crisis of confidence in American financial markets had metastasized to money markets everywhere.
That was on top of the $230 billion the Fed borrowed last week so it could finance its previous efforts to prop up the American International Group and other institutions.
But these are only the latest in a long series of jaw-dropping departures from normal policy that the Fed has undertaken this year as it seeks to inject vast amounts of capital into the financial system. And they are unlikely to be the last.
Even if Congress refuses to pass the bailout measure, there is more money where that came from. The Treasury Department has already created a series of “supplemental” Treasury securities to finance the Fed’s activities, and there is no limit to how many more it can issue and sell.
Treasury and Fed officials made it clear after the House vote on Monday that they still had a wide range of tools at their disposal.
But most of the remaining options are ad hoc, rather than systemwide. The Fed, for example, can lend money to any company it deems too dangerous to fail by invoking the same Depression-era law it has already used to deal with failing firms like Bear Stearns and AIG.
The Treasury Department, meanwhile, has already vowed to buy up billions of dollars in mortgage-backed securities under the authority it received in the housing bill that Congress passed in the summer.
The bad news is that those attempts have done little or nothing to bolster confidence in the financial markets. Yields on three-month Treasury bills shrank to just 0.29 percent on Monday, a sign that investors were fleeing from any kind of risk, even if it meant earning a return far lower than the inflation rate.
Interbank lending rates climbed to new highs on Monday, as banks became even more fearful about lending to one another than they were last week.
“The liquidity measures are a stopgap,” said Laurence H. Meyer, vice chairman of Macroeconomic Advisers, a forecasting firm. “You’re funding the banks’ balance sheets, but nobody wants to lend money to them because they’re all afraid of insolvency.”