Central bank and Treasury announce a massive plan to jumpstart lending.
NEW YORK (CNNMoney.com) — The Federal Reserve and Treasury Department on Tuesday unveiled hundreds of billions more in money they are pumping into the struggling U.S. economy, trying to jumpstart lending by the nation’s banks for mortgages and consumer debt.
Together, the programs from the Federal Reserve and the New York Fed aim to dump $800 billion in additional funds into the struggling U.S. economy, more than Congress approved in October for a bailout of the nation’s banks and Wall Street firms.
By putting that money in the hands of holders of securities backed by consumer and mortgage loans, the government hopes more money will flow to consumers than has occured so far in previous bailout plans.
But the program to make $200 billion available for a range of consumer loans – including credit cards and car loans – likely won’t be up and running until February. Government officials briefing reporters couldn’t say how much additional credit the program might make available to consumers in time to feed purchases for the holiday shopping season.
That $200 billion aimed at spurring consumer borrowing will come from the Federal Reserve Bank of New York, which will lend that money to holders of securities backed by consumer debt, such as credit card debt.
The statement from Treasury said that while roughly $240 billion of those kinds of securities were issued by the nation’s financial institutions in 2007, the issuance of those securities essentially came to a halt in October.
“This lack of affordable consumer credit undermines consumer spending and, as a result, weakens our economy,” said Treasury Secretary Henry Paulson at a press conference.
Paulson described the $200 billion program as a first step, one that could be expanded later to include different kinds of debt, including assets backed by commercial real estate mortgages and business debt.
He said the fact that the Fed and Treasury had to work together to get an additional $800 billion into the system is not a sign that the $700 billion bailout of banks and Wall Street firms passed by Congress last month has been a failure. He said that, without that program, it is likely that the financial markets would be in even worse shape than they are today.
“I wish, and I know everybody wishes, that one piece of legislation, and then magically the credit markets would unfreeze,” he said. “That’s not the type of situation we’re dealing with.”
The fact that the New York Fed is taking the lead on the new program aimed at increasing consumer lending means that the man nominated by President-elect Obama to succeed Paulson, New York Fed President Timothy Geithner, played a central role in this new effort.
Paulson said this is not a sign that the Bush administration is letting the new administration call the shots on new efforts to revive a struggling economy.
“We’re continuing to work everyday,” he said. “I am going to run right to the end (of my term).”
Treasury will allocate $20 billion to back that lending by the New York Fed, an attempt to cover any losses that the New York Fed might suffer as a part of the program.
But the $200 billion under this program, and an additional $600 billion being made available to increase mortgage lending, will come from an increase in reserves by the Fed. Essentially, the central bank is creating more money to cover the programs announced Tuesday.
The Federal Reserve, the nation’s central bank, announced it will purchase up to $500 billion in mortgage backed securities that have been backed by Fannie Mae (FNM, Fortune 500), Freddie Mac (FRE, Fortune 500) and Ginnie Mae, the three government-sponsored mortgage finance firms set up to promote home ownership. It will also buy another $100 billion in direct debt issued by those firms.
“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,” said the statement from the Fed.
Unlike shareholder-owned Fannie and Freddie, which were placed under conservatorship by the federal government in September because of mounting losses on the trillions of mortgages they backed or owned, Ginnie Mae has always been a government-owned corporation.
The $700 billion bailout of banks and Wall Street passed by Congress in October was supposed to get money flowing to consumers and to help stabilize the housing markets through the purchase of mortgage-backed assets held by the nation’s financial institutions.
That plan, known as the Troubled Asset Relief Program, or TARP, was quickly dropped for one in which Treasury instead made direct capital investments in banks in return for the government receiving preferred shares in the institutions getting funds.
This new program is much closer to the original plans for TARP in that mortgage assets are being purchased. But government officials briefing reporters stressed that this new plan is different from TARP in that only mortgage securities backed by Fannie, Freddie and Ginnie will be in the new program.
Those loans, for the most part, are of better quality than many of the troubled assets that would have been purchased under the original TARP plan.
There is also limited additional risk for the federal government from the Fed buying that $600 billion in debt from the three firms, since the government is already on the hook for losses those firms suffer on the loans they back.
Despite that implicit government guarantee behind Fannie and Freddie’s debt, there continues to be a widening gap between rates demanded by investors to buy U.S. Treasurys and the rates they demand to buy mortgage assets. The hope is that – by the Fed buying such a large amount of assets directly – it will narrow that interest rate gap, drive down mortgage rates for consumers and support home prices and purchases.
The Treasury, which oversees the $700 billion in the TARP program, has been reluctant to expand the use of those funds beyond direct capital investments in banks, despite request to use the funds to help out insurance companies and even the nation’s automakers. Thus it allocated only $20 billion, or the same amount it invested in troubled banking giant Citigroup (C, Fortune 500) in a move announced Sunday.
So it was left to the Federal Reserve of New York, which is headed by Timothy Geithner, the man nominated by President-elect Obama to take Paulson’s place, to come up with the funds to try to restart consumer lending.
The moves came as the Commerce Department announced that gross domestic product, the broad measure of the nation’s economy, fell at an annual rate of 0.5% in the third quarter, the biggest drop in economic activity in seven years. Economists believe that the economy is likely to continue to contract in the current quarter and into early next year.
The financial crisis has frozen lending markets, making it nearly impossible for consumers and businesses to borrow money.
Treasury originally had planned to use the $700 billion bailout to buy troubled mortgage assets. But it has shifted gears and focused mostly on injecting capital into banks.
The last capital injection into Citigroup was part of a broader rescue package under which Treasury and another U.S. agency, the Federal Deposit Insurance Corp., announced it would guarantee losses on more than $300 billion of Citi’s troubled assets.
But once again, Treasury is not using the $700 billion in bailout funds for that guarantee, as it tries to keep those funds available for future capital needs by the nation’s financial institutions.
Capital Gold Group, gold group, gold, gold prices, gold news, gold coins, gold bullion, gold IRA, IRA gold
Tags: Capital Gold Group, gold, gold bullion, gold coins, gold group, gold IRA, gold news, gold prices, IRA gold