Treasury, Federal Reserve Announce Programs to Aid Mortgages, Consumer DebtThe Treasury and the Federal Reserve on Tuesday presented two more programs totaling more than $800 billion to thaw out the frozen consumer debt market.
In a press conference on Tuesday morning, U.S. Treasury Secretary Henry Paulson Jr. unveiled the plans, saying they are much needed because "millions of Americans cannot find affordable financing for their basic credit needs. And credit card rates are climbing, making it more expensive for families to finance everyday purchases. This lack of affordable consumer credit undermines consumer spending and as a result weakens our economy."
Paulson says with these new programs, financial institutions can begin to step up their lending, adding that the programs' reach may be expanded over time to cover other areas, including commercial mortgage-backed securities.
Paulson stresses that there are two issues at stake that are separate, but closely related. "First, the strength and stability of the financial system, second is the economy. What has gone on in the financial system has affected the economy. Affordable lending must be made available, including consumer lending."
Fed Aid for Consumers, Mortgages
The Treasury Department and the Federal Reserve presented a new program to boost consumer lending, and a second one to purchase the direct mortgage obligations of Fannie Mae, Freddie Mac and Ginnie Mae.
The new consumer loan plan unveiled on Tuesday will help companies that issue credit cards, student loans and finance auto sales in an effort to break through the credit freeze that has seized up the economy.
The plan includes the creation of the Term Asset-Backed Securities Loan Facility (TALF), a facility to help market participants meet the credit needs of consumers and small businesses. Through TALF, the Federal Reserve Bank of New York will lend up to $200 billion to securities holders backed by consumer debt, including credit card debt.
Beginning in September, national credit card issuers ratcheted up standards on whom they issued credit cards to. A Federal Reserve survey earlier this month showed a sizable percentage of banks had continued to tighten lending standards and terms on all major loans in the three months leading up to November. Almost 60 percent of banks that answered the survey said they had tightened lending standards on credit card debt. These plans to pump money into the consumer debt market were alluded to last week by Secretary Paulson when discussing the state of the $700 billion bailout of the nation's banks and Wall Street. Federal Reserve Bank of New York's President and CEO Timothy Geithner (more about whom, see below) came up with the funds to jumpstart consumer lending.
Fed Backs GSE Mortgages
In the second plan, the Federal Reserve says it will buy up to $500 billion in mortgage-backed securities that have been backed by Fannie Mae, Freddie Mac and Ginnie Mae, the government sponsored enterprises (GSE) that were set up to help people get affordable mortgages. The Fed will also buy another $100 billion in direct debt issued by those firms.
"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," said the statement from the Fed. The frozen lending markets have made it nigh to impossible for average businesses and consumers to borrow funds.
Obama Team Taps Geithner, Summers
President-elect Obama's choices for top spots in his economic recovery team were announced on Monday. Timothy Geithner is Obama's choice for Treasury Secretary, and Lawrence Summers will head the National Economic Council. Over the weekend, Obama released his plans for economic recovery plan that is designed to save or create 2.5 million jobs and redirect the economy in the next two years. Obama also says he will "scour our federal budget, line by line and make meaningful cuts and sacrifices." The Obama administration already faces a record deficit of $237 billion, which only accounts for a portion of the $700 billion earmarked for the financial bailout.
Wall Street Up on Citi News
The news of the fed bailout of Citigroup on Monday was met by Wall Street with an upswing in the Dow of nearly 400 points. The Dow Jones Industrial Average closed up 396 points to 8,443 on the news. Citigroup's own stock recovered and gained 58 percent on word of the fed bailout and backing of Citigroup's $300 billion in toxic mortgage-related assets.
Economy's Big Drop
America's gross domestic product, the widest measure of the U.S. economic activity, had its biggest drop in seven years, according to a Commerce Department report. The GDP declined 0.5 percent in the three months ending in September. The third quarter drop was the biggest since a 1.4 percent decline in the third quarter of 2001, the last quarter that the U.S. economy was in a recession. There is no official word that the economy is in a recession now, but most economists think that the economy will continue to shrink this quarter and into early 2009.
Another sign of the economic throes is the record drop in home prices in the third quarter. Standard & Poor's/Case-Schiller index dipped a record 16.6 percent from the same period in 2007.