WASHINGTON -- Rolling out powerful new weapons against the financial meltdown, the Bush administration and the Federal Reserve pledged $800 billion Tuesday to blast through blockades on credit cards, auto loans, mortgages and other borrowing. Total federal bailout commitments neared a staggering $7 trillion.

Treasury Secretary Henry Paulson, who has been criticized for constantly revising the original $700 billion rescue program, said the administration was considering even more changes in its final two months in office.

Reports on the nation's economic health weren't getting any better. The Commerce Department said the overall economy, as measured by the gross domestic product, declined at an annual rate of 0.5 percent in the July-September quarter, even worse than the initial 0.3 percent estimated a month ago as consumer spending fell by the largest amount in 28 years.

In Chicago, meanwhile, President-elect Barack Obama named his budget director and said they both would focus on the nation's soaring budget deficit -- but only after an economic revival is under way. Paulson stressed that Obama's transition team was being kept informed of the government's moves.

Investors digested it all and sent the Dow Jones industrials 36 points higher, a modest gain but still the first time the average had risen three straight days in more than two months.

Millions of Americans rely on the kinds of loans that were targeted in one of the new programs announced Tuesday.

The Federal Reserve will purchase $200 billion in securities backed by various types of debt, including loans through credit cards and for autos, school and small businesses.

The Fed also announced that it would spend $500 billion to purchase mortgage-backed securities guaranteed by mortgage giants Fannie Mae and Freddie Mac and another $100 billion to directly purchase mortgages held by Fannie, Freddie and the Federal Home Loan Banks.

This would greatly expand an initial modest effort announced in September in which Treasury spent $26 billion to purchase mortgage-backed securities. The current credit crisis was greatly aggravated by soaring losses on securities backed by subprime loans.

The announcement of the new programs had an immediate positive impact on credit markets Tuesday, sending demand up and rates lower.

The programs to buy mortgage-related assets and securities backed by consumer debt have the same aim: to boost demand for those assets. In doing so, the government hopes to lower the costs being charged for consumer loans. That would make loans on everything from mortgages to cars more available.

The mortgage-backed securities the Fed will buy will be investment-grade assets -- not the toxic mortgage-related assets that the administration initially had said the $700 billion financial rescue program would buy.

By focusing on investment-grade securities, the Fed will be able to help provide a functioning secondary market. It will pay the prices for these securities that are being set by the market. Had the Fed needed to buy bad assets, it would have had to develop a mechanism to properly price assets that weren't being traded.

The use of Fed resources also gets around another problem Treasury faced: a limited amount of money in the program. The $800 billion being committed to buy mortgage-related assets and other assets backed by consumer loans will come from the Federal Reserve's vast resources. It will not count against the $700 billion rescue program.

The Treasury Department also announced Tuesday that the rescue program had spent an additional $2.91 billion for direct purchases of stock from 23 regional banks around the country. These institutions ranged from HF Financial Corp. in Sioux Falls, S.D., to Centerstate Banks of Florida Inc. in Davenport, Fla.

Comments

(Requires free registration.)

0 comment(s) found!