Bernanke Attacks the Recession with Force

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" The official said that Japan's central bank focused on the liability side of its balance sheet, emphasizing the expansion of cash and bank reserves in order to flood the banking system with money to lend.

In contrast, the official said, the Federal Reserve is putting its attention on the asset side of the balance sheet—buying up assets such as Treasuries and mortgage-backed securities in an attempt to drive down rates and improve the health of the overall economy and, in particular, the housing market. On the same day that the Fed made its move, the U.S. Commerce Dept. announced that new-home building starts in November fell by 19%, the sharpest monthly drop since March 1984.

New Program in the Wings

The distinction between the Japanese and American approaches is subtle because, as any accounting student knows, the asset and liability sides of the balance sheet are mirrors of each other. But under Bernanke, the Fed is clearly hoping that targeting certain key market interest rates will get lending and borrowing going again.

By its charter the Fed is not allowed to make loans or accept collateral that could expose it to a big chance of loss. That's where the Treasury Dept. comes in as a partner. In its Dec. 16 statement, the Federal Reserve served a reminder that it has a big new program in the wings in conjunction with Treasury. Starting early next year, the Fed will lend up to $200 billion to "facilitate the extension of credit to households and small businesses." To hold down the risk of losses by the Fed, the Treasury Dept. will absorb the first $20 billion in losses.

Business Exchange related topics:
Federal Reserve
Recession Spending and Investing
Fannie Mae and Freddie Mac
Housing Market

Coy is BusinessWeek's Economics editor.