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 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.
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 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.
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