Fed unveils $800 bn package for bailout

Thursday, November 27, 2008 at 4:11 am

The government will pump $800 billion more into the economy, $200 billion of that to jump-start consumer lending and $600 billion to buy mortgage-backed securities and other debt from the three government-financed mortgage companies, Treasury Secretary Henry Paulson said today (November 26).

The money is in addition to the $700 billion bailout that Congress approved in October for the nation’s banks and Wall Street financial institutions. That money originally was to be used to buy troubled mortgage assets, but Treasury changed its mind.

“The lack of affordable consumer credit undermines consumer spending and, as a result, weakens our economy,” Mr. Paulson told a news conference.

“The financial markets aren’t working as we’d like them to work,” he said, indicating the $700 billion bailout wasn’t enough to get the economy going again to help consumers and small businesses.

The idea behind the latest attempt to stimulate the economy is to put more money into the hands of consumers so they can make credit card, student and auto loans. The Federal Reserve Bank of New will supply $200 billion for that purpose.

The $200 billion plus $600 billion to boost mortgage lending will come from money created by the Federal Reserve. Fully $500 billion of that has been earmarked for Fannie Mae, Freddie Mac and Ginnie Mae, the three institutions created to foster home ownership.

The money will be used to buy mortgage-backed securities.

The Fed also will buy $100 billion more in direct debt issued by those three firms.

The action appeared to be a very strong Fed statement of support for the beleaguered housing industry. “We need the capability to strengthen the financial system and stabilize the financial system,” Mr. Paulson said.

The financial crisis that exploded in mid-September set in motion a refusal by the lending markets to lend money, making it nearly impossible for consumers and businesses to borrow money. Businesses largely have been paralyzed as a result.

For example, motorists have difficulty buying cars because they cannot borrow the money to pay for them. And interest costs have gone up. Money also has been frozen in the mortgage markets.

“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,” a Fed statement said.

(With inputs from agencies)

( This post is from an independent writer. The opinions and views expressed herein are those of the author and are not endorsed by APakistanNews.Com.)

Fed unveils $800 bn package for bailout

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