Federal Reserve, Treasury take more steps to boost lending

November 26th, 2008 - 2:09 am ICT by IANS  

Washington, Nov 26 (DPA) The US Federal Reserve and Treasury Department Tuesday announced two new programmes that will pump an additional $800 billion into the struggling economy and unfreeze credit for consumers and small businesses.This second stimulus follows the $700-billion rescue package already approved by Congress. Under one of the two new programmes, the Fed will use $600 billion to buy mortgage-backed securities to reduce the cost of home mortgages.

The other programme, the Term Asset-Backed Securities Loan Facility (TALF), by the Federal Reserve Bank of New York, will create a lending facility worth $200 billion to holders of securities backed by consumer debt - credit card, student and auto loans. This will essentially make it easier for consumers to borrow money.

The New York Fed is headed by Timothy Geithner, named Monday by president-elect Barack Obama as his Treasury Secretary. Geithner will be tasked with rescuing the financial industry from its worst crisis since the Great Depression when the new administration takes over on Jan 20.

The Treasury Department said it would provide $20 billion of credit protection to the New York Fed for TALF, Treasury Secretary Henry Paulson told a news conference Tuesday.

Consumer asset-backed securities (ABS) worth $240 billion were issued in 2007. But the widening financial crisis this year ensured that banks and financial institutions have been reluctant to lend, with credit markets essentially coming to a halt in October.

“As a result, 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,” Paulson said.

The lack of affordable consumer credit undermines spending and weakens the economy, he said.

In the newly-outlined programme for the ailing housing market, the nation’s central bank will buy up to $500 billion in mortgage- backed securities, which have been backed by government-sponsored mortgage finance firms Fannie Mae, Freddie Mac and Ginnie Mae. The Fed will buy an additional $100 billion of direct debt obligations of these 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,” the Fed said in a statement.

“Nothing is more important to getting through this housing correction than the availability of affordable mortgage finance,” Paulson said.

“It will take time to work through the difficulties in our market and our economy, and new challenges will continue to arise,” Paulson said, adding that the government was committed to stabilising the financial markets and minimizing the spillover to the rest of the economy.

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