Fed Tries to Loosen Credit For Consumer Purchases

The Federal Reserve threw a massive life-line to consumers Tuesday with two new programs aimed at making it easier for them to obtain loans for homes, cars and on credit cards.

Under the new mortgage program, the Fed will buy up to $100 billion of debt issued by government-sponsored mortgage enterprises Fannie Mae, Freddie Mac and the Federal Home Loan Banks.

AP

It will also buy up to $500 billion of mortgage securities backed by Fannie Mae, Freddie Mac, and Ginnie Mae.

The central bank also launched a $200 billion facility to support consumer finance, including student, auto, and credit card loans and loans backed by the federal Small Business Administration. This will lend to investors who hold securities backed by this debt.

"One of the big problems we have is that there has been a lack of demand for debt," said Scott Brown, chief economist at Raymond James & Associates in St. Petersburg, Florida. "You have seen the market for securitized debt such as credit cards or student loans dry up completely."

"Here is the Fed taking a bunch of debt out of the market," he said. "It should help unblock the credit markets."

The new mortgage-support facility was intended to strike at the collapsed housing market, the core of the United States' economic woes.

"This action is being taken to reduce the cost and increase the availability of credit for the purchase of houses, which in turn should support housing markets and foster improved financial conditions more generally," the Fed said.

Investor appetite for both the debt issued by Fannie Mae and Freddie Mac and the mortgage-backed securities they guarantee has dried up since the government seized the companies in September, and the Fed hopes to fill that void.

Video: Treasury Secretary Paulson discusses latest government efforts.

"They are getting to the heart of the problem, it's clean, it's quick, it's direct," said Todd Abraham, co-head of government and mortgage bonds at Federated Investors in Pittsburgh, Pennsylvania. "It's a good way to bring down mortgage rates."

Under the consumer-finance facility, the Treasury will help cover any losses the Fed might face by providing $20 billion of credit protection from its $700 billion financial bailout fund, which Congress approved last month.

A Treasury spokeswoman said the $20 billion will come from the remaining unallocated $40 billion in the first tranche of the $700 billion financial rescue fund.

That leaves Treasury with $20 billion, and once that is used it must ask Congress for access to the remaining $350 billion in the fund.

The Treasury noted that issuance of asset-backed securities in consumer lending categories such as credit cards, auto loans and student loans had essentially ground to a halt in October. Last year, issuance was roughly $240 billion.

"Continued disruption in the ABS market could further deteriorate credit availability for consumers and increase the prospects for further deterioration in the economy generally," the Treasury said in a statement.

The Fed's twin announcements marked the latest in a series of emergency measures by U.S. authorities to try to keep the economy from falling into a deep and prolonged recession.

Late Sunday, the government stepped in to prop up the second largest US bank, Citigroup.

Most economists say the emergency steps represent a necessary, if ad hoc, response to the greatest financial shock the United States has experienced since the Great Depression.

Some, however, are worried the mounting costs of the measures, which have the potential to reach several trillion dollars, could eventually fuel a troubling inflation.

"It may mean (a) longer-run issue with inflation and inflation concerns," said John Silvia, chief economist at Wachovia Securities in Charlotte, North Carolina. "It may be too much of a good thing is a bad thing. We may be overpaying for bad assets."

Policy-makers, however, have signaled a willingness to do whatever it takes to try to tamp down the risk of a severe recession.

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