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 bailout commitments, loans and pledges of backing 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 will focus on the nation’s soaring budget deficit — but only after 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 different types of debt including credit card loans, auto loans, student loans and loans to small businesses. That market essentially froze in October. These types of loans as a result have become harder to obtain and have carried higher interest rates
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 back in September in which Treasury spent $26 billion to purchase mortgage-backed securities. The current credit crisis was triggered 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. Analysts predicted the program could send mortgage rates down by as much as one-half to a full percentage point in coming months, helping to spur demand in the beleaguered housing market, which is suffering its worst downturn in decades.
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.
“This is one of the key actions we’ve been advocating,” said Charles McMillan, president of the National Association of Realtors, referring to the purchase program for mortgage-backed assets.
The latest federal moves raised U.S. commitments to contain the financial crisis to nearly $7 trillion — though no one thinks the government will actually spend anything like that figure, which would be almost half the nation’s total gross domestic product. The figures include loans that are expected to be repaid, loan authorities to back mortgages, purchases of stock in banks, guarantees to support loans among banks and pledges backing other transactions.
In the case of the Federal Reserve, the amount covers huge loans that financial institutions will have to pay back. In the case of the Treasury rescue effort, the government will at some point sell the stock it owns back to the banks, presumably when the banking system is doing better and the stock will be worth more.
As for Tuesday’s actions, 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 another $2.91 billion in 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.
The government has now injected $161.5 billion in 53 institutions. The goal is to spend $250 billion of the $700 billion bailout fund to buy bank stock as a way of encouraging banks to resume more normal lending to bolster the shaky economy.
A boost to the overall economy is considered vital at a time when nearly every day has brought further evidence that the country is sliding into a severe downturn.
Nariman Behravesh, chief economist at IHS Global Insight, said he thought the economy would shrink by an even more drastic 4 percent annual rate in the current quarter and keep falling through the middle of 2009.
“We are in the early stages of one of the worst recessions in the postwar period, even factoring in a massive stimulus program,” Behravesh.
Obama is putting together a stimulus program with the goal of creating 2.5 million jobs over the next two years. It’s an effort that many economists think will need to total between $500 billion and $700 billion to bring the benefits needed to help shore up the economy.
Obama pledged Tuesday to make deficit reduction a goal of his administration — but only after recovery from the financial crisis is well under way. “We are going to have to jump start the economy,” he said.
At a news conference, Obama claimed a “mandate to move the country in a new direction,” and promised to consult with Republicans as he goes about it.
The effort to restart the frozen market for securities that back consumer debt will get an assist from the government’s $700 billion financial rescue fund, which Congress passed on Oct. 3. Paulson told reporters that the fund will supply $20 billion as protection for the Fed against losses in its purchases of securities for the program.
He also signaled that the program could be expanded to include asset-backed paper that covers commercial mortgage loans. Those loans are used to finance shopping malls and office buildings.
Paulson defended the administration against charges that it has made haphazard changes in the financial rescue program, sending confusing signals to markets. Initially, the effort was sold to Congress as a way to buy toxic mortgage-related assets off the books of financial institutions. The idea was to give them the capital needed to resume more normal lending.
When the financial crisis worsened and Paulson decided it would take too long to get the toxic purchase program operating, he switched to making direct purchases of bank stock with the rescue funds. Paulson announced that the first $350 billion installment of the rescue fund probably would not be used to buy any toxic assets.
“It is naive for any of us to think that when you are dealing with a situation of this magnitude that a bill could be passed or a single action taken to make all the issues go away,” Paulson told reporters at a briefing.
Paulson declined to say whether the Bush administration would seek authority from Congress to tap a portion of the second half of the $700 billion fund before leaving office. That decision had not yet been made, he said.