Will Fed's financial relief program help you?

This may cause the interest rates to go up. Since unemployment levels are quite high and savings have become stagnant, consumers already overloaded with debts and other financial difficulties may not be able to borrow at high interest rates. It may eventually lead to “crowding out”. The phenomenon could be reflected through borrowing as well as savings.

It is being anticipated that in order to pull back the economy from crisis as much as USD2.1 trillion may be required and this could be done by swelling the balance sheet of the Federal Reserve. In order to reduce the cost of borrowing, the Fed has taken the initiative to buy USD$750 billion in mortgage-backed securities and USD$300 billion in Treasuries.

The cost of borrowing could be offset if investors purchase corporate bonds and make use of the high yields (7%) as a safety net with higher returns. Stocks are expected to do well since dollar denominated assets will do well too. It can be attributed to the fact that increasing rate of interest will cause the dollar value to go up. As a result hoarding cash will not be encouraged.

Consumers may switch over to corporate assets

Consumers are showing inclinations towards the stock market. The stock market is steadily turning around. Financial experts are of the opinion that due to the “crowding out effect”; consumers are increasingly waiting for the stock market to regain. If things turn around rather quickly, majority of the consumers will switch over to corporate assets just as quickly as they had turned to the Treasury market for refuge.

It is inevitable that interest rates are bound to rise. And with the growing economy, circulation of money will grow too. If the government is encouraging investors to opt for riskier products, it should also keep the provision of higher returns. Some financial experts feel that by printing money, financial prosperity cannot be achieved. In fact, finding a market for the circulation of the money is vital. Consumers are already reeling under debts and it is important to give them financial solace under prevailing economic conditions.

Investor reluctance in opting for government programs

The major problem prevailing is the reluctance of the consumers opting for government programs. Most of the investors fear that if they get “hooked” with the government programs, there may be a time when the government may alter norms and impose harsh limitations midway.

With the prevailing economic slump, decreasing inflation, with consumer credit dropping at 3.5% annually and a slump of 9.75% in revolving credit, it is unlikely that consumers need to fear about the “crowding out” effect before 2011. The main cause of concern presently is to tackle recession. Fear of rising interest rates can be handled at a later stage.

Contributed by Debt Community