Fed Tries to Calm Financial Sector

By: Pamela Mortimer

The global financial sector is holding its breath regarding corporate earnings after a massive sell-off on Wall Street on Monday. Many are looking to Fed Chairman Ben Bernanke for reassurances.

The U.S. isn’t the only country in a credit crunch. Russia has just revealed a rescue package for its banks as well as an emergency aid plan for Iceland. Japan is asking for better cooperation.

Right now, the Fed’s aim is to ease the crunch by developing a new commercial paper facility designed to buy short-term debt. The program will, in essence, fund corporate borrowing for the very first time.

The Federal Reserve interceded as a last resort and will most likely exceed the $700 billion aid package approved by Congress on Friday.

The International Monetary Fund has reconsidered its recent estimate of global losses due to the financial crisis. The new estimate came in about $1.4 trillion, although the worst is yet to come.

"The financial planet is in total crisis," said European Central Bank Governing Council member Guy Quaden.

Statistics show that there is much to warrant concern.

Central banks are struggling to increase their after the Australian government drastically cut interest rates by 100 basis points to 6%. Other countries have taken emergency action.

The Russia-Iceland aid package consisted of a 4 billion euro ($5.44 billion) loan to Iceland. The Russian government also offered rescue packages to domestic banks in the amount of 950 billion rubles ($36.4 billion) on a long-term basis.

Britain has considered a substantial injection of public monies as some of Britain's largest High Street banks began to stumble. Shares at the Royal Bank of Scotland have plummeted by as much as 30%.

European Union finance ministers have agreed to increase the minimum amount of bank deposit insurance throughout 27 EU member countries.

The Japanese government has implied that it will not cut its rates. China's banking regulator has denied claims that Beijing is considering coming to the Fed’s rescue. A Chinese state newspaper printed a comment that said the world should not pay for the mistakes made by the U.S.

Japanese Prime Minister Taro Aso has hopes that the Group of Seven (G7) wealthiest nations will set forth a clear message on stabilizing global financial markets at a meeting scheduled in Washington, D.C. later this week.

"The impact would be substantial if the G7 didn't send a clear message. European leaders have met, but it didn't go well, and European financial markets have fluctuated rapidly and substantially, so I'm worried about the impact on Japan," Aso said.