WASHINGTON -- The Federal Reserve on Tuesday unveiled $800 billion in programs designed to relieve severe pressures in financial markets, and ensure that mortgages, student loans, car loans and other forms of consumer credit remain available at reasonable prices.
"Millions of Americans cannot find affordable financing for their basic credit needs," Treasury Secretary Henry Paulson said, announcing the moves jointly with the Federal Reserve. "This lack of affordable consumer credit undermines consumer spending and as a result weakens our economy."
In the latest in a series of increasingly dramatic announcements, the Federal Reserve said Tuesday that it would buy up to $600 billion in mortgage-related assets, including $100 billion in bonds or other debt issued by Fannie Mae and Freddie Mac and the Federal Home Loan Banks, and $500 billion in other mortgage-backed securities guaranteed by the government entities, including Ginnie Mae, which oversees Federal Housing Administration mortgages.
The move is intended to pump cash back into the mortgage lending process and increase the availability and affordability of mortgage financing. Paulson said "nothing is more important" to housing and the overall economy than making mortgages easier and more affordable to obtain.
The Fed also said it would lend up to $200 billion to securities dealers and other financial firms that hold Triple-A rated securities backed by "newly and recently originated" consumer loans, such as credit cards and auto loans. The program will also cover loans originated by the government's Small Business Administration.
The Treasury will provide $20 billion from the recently enacted $700 billion financial rescue package to cover potential losses from the program. The first losses will be borne by borrowers under criteria yet to be determined.
Paulson called the $200 billion a "starting point," and said the amount could be increased and the program expanded to other kinds of securities, such as commercial mortgage-backed securities.
The program 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," Paulson said. He declined to say when consumers might see the effect of the programs, arguing the USA is currently in a "twice in a hundred years historic situation" marked by "unpredictability."
A secondary effect of the programs announced Tuesday is that they will pump cash into the financial system, increasing bank reserves. That could help inflate the economy at a time when officials are increasingly worried about possible deflation — widespread falling prices that can cripple economic activity.
Officials said larger bank reserves are a side effect of the program, however, not a central aim. The program will essentially be financed by having the government increase the money supply.
"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 Fed said.
The announcements came amid fresh evidence the economy is rapidly deteriorating, despite aggressive Fed efforts the past year, including sharp interest rate cuts and expanded lending to financial firms.
The government issued revised data showing the economy contracted at a faster pace than initially thought in the July-September quarter, while a key measure of housing in 20 major markets found prices down a sharper-than-expected 17.4% from last year. Consumer confidence improved modestly this month after hitting the lowest on record in October but it points to continued pessimism.
Paulson said he had worked through the weekend on the proposal with officials including New York Fed President Timothy Geithner, who was nominated by Obama Monday to be his Treasury secretary. Paulson said Geithner is "very well-positioned" for the job because he has worked with Treasury officials throughout the crisis.
A main goal of the sweeping initiatives announced Tuesday is to reduce market risk so investors will be more willing to buy securities and consumers will have access to loans at rates and under conditions closer to those before the financial crisis.
The Fed noted that the level of asset-backed securities being issued to provide cash for consumer loans "declined precipitously in September and came to a halt in October." At the same time, consumer interest rates rose as the interest-rate risk premiums for the asset-backed products soared.
Credit is essential to consumer spending, which accounts for more than two-thirds of economic activity. In the July-September quarter, consumer spending fell at the fastest pace in 28 years, the Commerce Department said.
Fed officials said the program announced Tuesday is different from the $700 billion financial rescue package passed by Congress, which was originally designed so the government would buy troubled assets and take them off lenders' balance sheets.
The government is seeking to bolster quality assets through the new programs, making up for a lack of balance sheet capacity and lack of buyers in the financial system, due to continuing stresses and the fact some major financial players are no longer in business, such as some securities lenders and bank affiliates.
The $100 billion in Fannie and Freddie debt will be purchased by the Fed via the mortgage-backed securities through money managers.
With nearly all of the first $350 billion in the $700 billion program spoken for, speculation has risen that the Bush administration will need to ask Congress for the rest of the money. But Paulson said Treasury has "no timeline" to seek congressional approval. "When the time is right, we will avail ourselves," he said.
Lawmakers may try to attach strings to the second $350 billion, such as requiring Treasury to lend money to automakers or force Paulson to use government money to help prevent mortgage foreclosures.
Paulson said the administration is continuing to work on a foreclosure mitigation program, but noted the challenge is to avoid using government money to help homeowners who do not need help or whose mortgages could have been reworked without government aid.
"It's a challenging area," Paulson said.
Rebuffing criticism that the administration was going to pass off the issue to the Obama administration in January, he said, "I am going to run right until the end."