Fed Readies $800 Billion To Boost Lending

The Federal Reserve says it will buy up to $600 billion in mortgage-backed assets in another attempt to deal with the financial crisis. The news comes as the Fed also said it will lend up to $200 billion to the holders of securities backed by various types of consumer loans.

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STEVE INSKEEP, host:

It's Morning Edition from NPR News. Renee Montagne is away. I'm Steve Inskeep, good morning. The Bush administration and the Federal Reserve are stepping up their efforts to fight the financial crisis. Here's what they're doing. They've announced two different initiatives. And when you add them up, they're as big or bigger than the original financial bailout. One is aimed at unfreezing loans for homeowners, and the other is aimed at loosening up lending for things like cars and student loans. NPR's John Ydstie joins us now to talk about all of this. John, good morning.

JOHN YDSTIE: Hi, Steve.

INSKEEP: OK, the big thing first, the aid for the mortgage market. How much? And how do they want to spend it?

YDSTIE: The number is $600 billion, and this is new money coming from the Federal Reserve. It's committed to supporting the housing market. Most of it will go to buy up mortgage-backed securities held by Fannie Mae and Freddie Mac. But some of it, about $100 billion, will be used to make purchases of Fannie Mae and Freddie Mac debt. Here's what Secretary of the Treasury Henry Paulson had to say about why they're doing this.

Secretary HENRY PAULSON (Treasury Department): The root cause of the economic problem in our nation was a major housing correction. Now it has spilled over into other parts of the economy, but that continues to be a very major focus. And I think the most important thing we can do is have mortgage financing be available and rates continue to decline here.

INSKEEP: That's Treasury Secretary Henry Paulson. We're with NPR's John Ydstie. And, John, I can imagine someone rephrasing what Paulson said and saying the root cause is struggling homeowners who can't pay their mortgages. Is any of that $600 billion going to homeowners?

YDSTIE: No. This is not for homeowners. And that could be certainly a PR problem with Congress. Congress wants very much for the Bush administration, the federal government, to spend some money helping struggling homeowners, but this is aimed only at getting money into the housing market. And I suppose you could say it will help struggling homeowners if by getting more money into the market it pumps the market up, people go out and buy homes, and people's houses don't fall in value. It could help people who are losing the value of their home. But for people facing foreclosure, no specific help here.

INSKEEP: If it gets the mortgage market moving again, and I'm struggling, could it help me refinance, get a lower interest rate?

YDSTIE: It might help you do that as well, yeah.

INSKEEP: OK. All right. Now the other program announced today, John Ydstie, has to do with freeing up money for consumers, not buying homes, but dealing with things like cars and student loans and credit card purchases. What's happening there?

YDSTIE: Well, the Fed is committing another $200 billion in loans. Again this is new money - not part of the $700 billion TARP - authorized by Congress to help provide consumer credit. A lot of people don't know this, but just like mortgages, there's a secondary market for car loans and student loans and even for credit card debt. That market has been either frozen up or extremely tight lately.

INSKEEP: This is the same deal as the mortgage-backed securities - a bunch of credit card debt or...

YDSTIE: Right. You take my credit card debt, your credit card debt, and your neighbor's credit card debt, you bundle them all together, and an investor buys that. Well, people aren't buying that. And what the Fed is doing is lending money. In this case the Fed is not actually going to buy this debt. It's lending money to investors who are willing to go into that market and buy debt.

INSKEEP: OK. John Ydstie, do I dare to ask where the federal government comes up with another $800 billion on top of all the other money that's already been talked about and committed?

YDSTIE: Well, most of this money will come from the Fed. There's about $20 billion from the TARP that will be used in the consumer credit facility.

INSKEEP: That's the $700 billion bailout?

YDSTIE: Right, right.

INSKEEP: All right.

YDSTIE: But most of this - the rest of this $800 billion will come from the Fed. And the Fed has a huge balance sheet. It has $900 billion on its balance sheet. It can also print money. And the Fed will be taking these things as assets onto its balance books.

INSKEEP: I'm sorry, jaws are dropping all over America, John.

YDSTIE: Yeah. All right, all right.

INSKEEP: They can just print money? That's outrageous. Aren't they borrowing it from somewhere? Getting it from somewhere? Selling bonds?

YDSTIE: They'll sell their own bonds. They'll get money that way. But ultimately that's printing money. The problem is what the Fed says is, look, we think these assets are good, and we think we're not going to lose money on it in the end.

INSKEEP: OK. That's NPR's John Ydstie. Thanks very much.

YDSTIE: You're very welcome.

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