Washington Spends Money On Main Street
On Tuesday the Federal Reserve introduced two sweeping programs aimed at making it easier for Americans 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. 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.
“The Fed is going into high gear now in what we call non-traditional methods of monetary policy because traditional methods are not working well,” said former Fed Governor Lyle Gramley on Fast Money.
“When you get into a situation like this and the economy is deterirating rapidly you turn to non-traditional policies. That’s when you lend, expand the balance sheets, and bring down critical interest rates like mortgages.”
"One of the big problems we have is that there has been a lack of demand for debt. You have seen the market for securitized debt such as credit cards or student loans dry up completely," said Scott Brown, chief economist at Raymond James & Associates in St. Petersburg, Florida.
"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.
“If we can build confidence in the minds of investors this credit crisis could thaw in a hurry and we could see the economy turn around by the middle of next year,” Gramley told the Fast Money traders.
What’s the bottom line? “The Fed is telling the public they are going to do whatever is needed to turn this economy around,” Gramley said.
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Trader disclosure: On Nov.25, 2008, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Adami Owns (AGU), (BTU), (C), (GS), (INTC), (MSFT), (NUE); Macke Owns (MSFT), (WMT), (UUP); Macke Is Short (TM); Najarian Owns (CTX) Calls; Najarian Owns (ETFC); Najarian Owns (MOT) Calls; Najarian Owns (PHM) Put Spread; Najarian Owns (PRU) Calls; Najarian Owns (UYG) Calls; Finerman's Firm Owns (DNA) And (DNA) Calls; Finerman's Firm Owns (CSCO), (XLF), (MSFT); Finerman's Firm Is Short (USO), (IYR), (IJR), (MDY), (SPY), (IWM)
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