Contagious

No, not Bush and his Lyme's disease.

No, I'm talking about the subprime meltdown. The effect is growing and the Fed is clearly worried ...

The scramble for liquidity in Europe spilled over into the U.S. The federal funds rate, the rate at which banks make overnight loans to each other, was between 5.375% and 5.5% in early trading in New York, analysts said, well above the Federal Reserve's 5.25% target.

The Fed, in an effort to get the funds rate back down and meet the spike in demand for cash, lent $24 billion through its open market operations. It did so through two operations: A 14 day "repo," the name for an operation that adds reserves to the banking system and alleviates upward pressure on rates, and an additional $12 billion through an overnight repo. It is common for the Fed to do the two types of operations, but analysts said the amount added was relatively high, exceeding what it would have injected to cover expiring repos.

This has the markets spooked, and for good reason. Let's hope the "contagion" is contained without further "spilling over". The economy is already dragging and consumers are pulling in their wallets, which is terrible news for growth.

Added: Mish explains why more "cash" is needed. Think, "run on the bank" type stuff as investors want to bail out of risky investments. So the government prints more money and puts it into the system to meet the need.