The Federal Reserve has auctioned another $25 billion in loans to squeezed banks to help them overcome credit problems. The central bank on Tuesday released the results of its most recent auction. It's part of an ongoing program started in December that seeks to ease financial turmoil and credit stresses. Those programs - along with the depressed housing market - have badly pounded the economy, forcing companies and people to clamp down. In the latest auction, commercial banks paid an interest rate of 2.670 percent for the 84-day loans. There were 38 bidders. The Fed received bids for $31.64 billion worth of the loans. The auction was conducted on Monday with the results made public on Tuesday. The Fed in mid-December announced it was creating an auction program that would give banks a new way to get short-term loans from the central bank and help them over the credit hump. In late July, the Fed expanded the program, making the longer 84-day loans available, besides the existing 28-day loans. The worst global credit crisis seen in decades has made banks reluctant to lend to each other, which has crimped lending to individuals and businesses. The smooth flow of credit is the economy's oxygen. It permits people to finance big-ticket purchases, such as homes and cars, and helps businesses expand operations and hire workers. Wanting to avert a broader panic that could endanger the entire US financial system, the Fed has taken a number of extraordinary actions to provide relief. In its broadest extension of lending authority since the 1930s, the central bank agreed in March to temporarily let investment firms obtain emergency, overnight loans directly from the Fed, a privilege that only commercial banks had been granted. The Bush administration stepped in Sunday to snatch control of troubled mortgage giants Fannie Mae and Freddie Mac, effectively putting the government at the heart of the mortgage-finance business. The takeover has the potential to put billions of taxpayers' dollars at risk. The action means that Fannie and Freddie won't be tapping the Fed's emergency borrowing program for a quick source of cash. The Fed in July told the companies that they could draw loans directly from the central bank if they needed cash to stay afloat. Meanwhile, the federal government will run a near-record deficit of $407 billion for the budget year ending Sept. 30, according to the latest Capitol Hill estimates. The new Congressional Budget Office figures released Tuesday say the flood of red ink will spill over into next year, when the deficit would reach a record $438 billion - and could go even higher as the government takes over mortgage giants Fannie Mae and Freddie Mac. The CBO figures for this year are slightly worse than White House predictions released in July. The White House foresees a $389 billion deficit for 2008 and a 2009 deficit of $482 billion. Next year's figure would also increase assuming Congress steps in to fix the alternative minimum tax, or AMT, which is expected to add at least $50 billion more. The numbers represent about 3 percent of the size of the US economy, which is the deficit measure seen as most relevant by economists. That's considerably smaller than the deficits of the 1980s and early 1990s, when Congress and earlier administrations cobbled together politically painful deficit-reduction packages. Still, the new figures are so eye-popping in dollar terms that it may restrain the appetite of the next president, who takes office Jan. 20, to add to it with expensive spending programs or new tax cuts. In fact, pressure may build to allow some tax cuts enacted in 2001 and 2003 to expire as scheduled at the end of 2010, with Congress also feeling pressure to curb spending growth. The deficit for 2007 totaled $161.5 billion, which represented the lowest amount of red ink since an imbalance of $159 billion in 2002. The 2002 performance marked the first budget deficit after four consecutive years of budget surpluses. “Today's estimates provide the latest evidence of the fiscal legacy of Republican policies: record deficits and a weak economy,” said House Budget Committee Chairman John Spratt Jr. “It's another reminder of the dismal economy and budget that Republicans are leaving others to sort out.”
