Tuesday, November 25, 2008

New $800 Billion Program to Spur Lending

As if the 7.7 Trillion wasn’t enough…

The New York Times reports U.S. Unveils New Programs to Ease Credit

The Federal Reserve said that it would buy up to $600 billion in mortgage-backed assets from the government-sponsored mortgage finance giants Fannie Mae and Freddie Mac. The agency would also buy up to $100 billion in debt directly from the companies and up to $500 billion in mortgage-backed securities.

“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 Federal Reserve said in a statement.

Separately, the Fed and Treasury Department announced a $200 billion program to ease commercial lending on debts like student loans, car loans or business loans. The Fed would lend up to $200 billion to holders of asset-backed securities supported by car loans, credit card loans, student loans, and business loans guaranteed by the Small Business Administration.

The action by the Federal Reserve on buying mortgage-backed securities brings the full force of monetary policy to bear on the credit markets. Having already reduced the benchmark federal funds rate to just 1 percent, the central bank is now effectively using what economists call “quantitative easing” to reduce the costs of money.

Instead of trying to reduce overnight lending rates in the hope of influencing longer-term interest rates for things like mortgages, the Fed is directly subsidizing lower mortgage rates. It is doing so by printing unprecedented amounts of money, which would eventually create inflationary pressures if it were to continue unabated.

For the moment, Fed and Treasury officials made it clear that the sky was the limit.

Treasury Secretary Henry M. Paulson Jr. emphasized Tuesday that the $200 billion was just a “starting point” for a program that could become substantially larger, possibly including other assets like commercial mortgage-backed securities.

“It’s going to take awhile to get this program up and going and then it could be expanded and increased over time,” he said at a news conference. “The first thing is to get it up and going.”

Like trying to blow up a balloon with a hole in it…