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Treasury Unveils New Plan To Bolster Markets

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Treasury Unveils New Plan To Bolster Markets

Economy

Treasury Unveils New Plan To Bolster Markets

Treasury Unveils New Plan To Bolster Markets

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The Bush administration and the Federal Reserve have unveiled a stepped up plan to fight the ongoing financial crisis. The Fed is committing as much as $600 billion to shore-up Fannie Mae and Freddie Mac. The Fed and Treasury are also moving to get the economy going again by putting up to $200 billion to work in secondary markets for consumer lending.

MICHELE NORRIS, Host:

From NPR News, this is All Things Considered. I'm Michele Norris.

MELISSA BLOCK, Host:

And I'm Melissa Block. Another day, another massive infusion. Today the Federal Reserve and the Treasury announced they would inject as much as $800 billion into the economy. That's $100 billion more than the original bailout plan. The money will go in two separate routes, both to free up lending for consumers, as NPR's John Ydstie reports.

JOHN YDSTIE: In a stunning exercise of its power, resources and independence, the Federal Reserve today committed more for the struggling economy than the controversial $700 billion TARP program authorized by Congress. And the Fed did it with two press releases barely two pages long and not a word from Fed chairman Ben Bernanke. In one press release, the Fed announced that it will buy up to $500 billion in mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac and other federally backed lenders. It also said the Fed will buy up a hundred billion in debt issued by the two mortgage giants. Treasury Secretary Henry Paulson said the Fed move is crucial to solving the housing crisis.

HENRY PAULSON: Nothing is more important to getting through this housing correction than the availability of affordable mortgage finance.

YDSTIE: Mark Zandi of moodyseconomy.com says he thinks the action could be effective.

MARK ZANDI: This is a good step. I think it'll bring down mortgage rates. The 30-year fixed mortgage rate, today is six percent. I think after this it'll be closer to five and half, and that'll make a big difference in terms of refinancing and in home sales. But it's not enough. I mean, I do think we need to have a comprehensive big mortgage mitigation plan to try to keep people in their homes and not going through foreclosure. So this is a good step, but it's not enough.

YDSTIE: Zandi also points out that, unlike the original idea for the $700 billion TARP program authorized by Congress, this Fed program will not be buying up toxic mortgage-backed securities. Securities the Fed will be buying will not include the subprime and exotic mortgages that are falling into foreclosure by the millions. These will be safe investments, Zandi says, and the Fed is unlikely to lose money on them. But, he says, the move does suggest the government takeover of Fannie and Freddie has not been as successful as had been hoped.

ZANDI: Everyone had hoped when Fannie and Freddie were nationalized that that would have brought down mortgage rates significantly. And mortgage rates are down. They're lower than they would have been otherwise, but they haven't come down as much as expected or as had been hoped for. And this is an effort to bring them down further.

YDSTIE: The other program the Fed announced today would inject $200 billion into the market for consumer loans, which has been frozen, says Zandi.

ZANDI: Many credit cards, vehicle loans, student loans, other consumer financial loans are packaged up and sold as securities to investors. It's really those investors that are providing the cash for those loans. But those investors aren't buying those securities now, and so those loans are getting increasingly difficult to make.

YDSTIE: So the Fed is stepping in and telling the banks and car companies who make those loans that it will lend them money so they can start making loans again. The Fed expects to get paid back, but there is some risk for taxpayers. So the Treasury is putting up $20 billion from the TARP program to absorb potential losses. But Secretary Paulson says it's necessary to boost the struggling economy.

PAULSON: The Federal Reserve facility will enable a broad range of institutions to step up their lending, enabling borrowers to have access to lower-cost consumer finance and small business loans.

YDSTIE: So, where is the Federal Reserve getting $800 billion? Well, it's just creating it. Printing it, you might say. It's adding more money to the overall money supply. That could be inflationary if the Fed doesn't skillfully remove the money from the economy once the crisis is over. But at this point everyone seems ready to take that risk. John Ydstie, NPR News, Washington.

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Fed To Give Credit Markets $800 Billion Jump-Start

NPR's John Ydstie talks with Steve Inskeep on 'Morning Edition'

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David Wessel of 'The Wall Street Journal' talks with Steve Inskeep on 'Morning Edition'

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Treasury Secretary Henry Paulson briefs reporters at the Treasury Department in Washington, D.C. i

Treasury Secretary Henry Paulson briefs reporters Tuesday on the implementation of the Emergency Economic Stabilization Act at the Treasury Department in Washington, D.C. Mark Wilson/Getty Images hide caption

toggle caption Mark Wilson/Getty Images
Treasury Secretary Henry Paulson briefs reporters at the Treasury Department in Washington, D.C.

Treasury Secretary Henry Paulson briefs reporters Tuesday on the implementation of the Emergency Economic Stabilization Act at the Treasury Department in Washington, D.C.

Mark Wilson/Getty Images

Treasury Secretary Henry Paulson said Tuesday that new programs totaling $800 billion are designed to help stabilize the nation's financial system and support vital consumer spending.

Paulson said key markets for consumer debt, such as credit cards, auto loans and student loans, essentially came to a halt in October and that the new programs are aimed at getting lending back on track.

Paulson said he and his regulatory colleagues are "committed to using all the tools at our disposal to preserve the strength of our financial institutions and stabilize our financial markets to minimize the spillover into the rest of the economy."

The Federal Reserve announced the massive deal to buy $600 billion worth of mortgage-backed assets and $200 billion in consumer debt securities Tuesday, as the government struggles to stabilize the economy amid an unprecedented financial crisis.

The central bank said it would buy up to $100 billion in direct obligations from Fannie Mae, Freddie Mac and the Federal Home Loan Banks, the government-sponsored mortgage finance enterprises. It said it would also purchase up to $500 billion in mortgage-backed securities — pools of mortgages that are bundled together and sold to investors.

"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 conditions in financial markets more generally," the central bank said in a statement.

"Purchases of up to $500 billion in [mortgage-backed securities] will be conducted by asset managers selected via a competitive process, with a goal of beginning these purchases before year-end," the Fed stated.

The central bank also launched a $200 billion facility to back consumer loans, including student, auto and credit card loans and loans backed by the federal Small Business Administration.

Paulson said the program is just a starting point: "It is going to take a while to get this program up and going, and then it can be increased over time."

From wire service reports

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