Paulson pledges use of all tools to maintain financial institutions, stabilise markets
 | Email this article |
 | Print article |
 | Feedback |
(WASHINGTON) The US central bank threw a massive life-line to consumers and the financial system yesterday with two programmes aimed at injecting liquidity and making it easier for consumers to get loans for homes, cars and on credit cards.
Under the new mortgage programme, the Federal Reserve will buy up to US$100 billion of debt issued by government- sponsored mortgage enterprises Fannie Mae, Freddie Mac and the Federal Home Loan Banks. It will also buy up to US$500 billion of mortgage securities backed by Fannie Mae, Freddie Mac and Ginnie Mae.
The Fed also launched a US$200 billion facility to support consumer finance, including student, car, and credit card loans and loans backed by the federal Small Business Administration.
This will lend to investors who hold securities backed by this debt.
The launch of the two programmes did not seem to excite the stock market by much, driving up the Dow by about 100 points within minutes of the opening before the blue chip index began flatlining by late morning.
US Treasury Secretary Henry Paulson said that the Fed lending programme will enable banks to extend more credit to consumers and businesses.
  |
'I and my regulatory colleagues are committed to using all the tools at our disposal to preserve the strength of our financial institutions and stabilise our financial markets, to minimise the spillover into the rest of the economy,' he said in a statement at a press conference.
The programme 'underscores our support for the housing market', he said. 'Nothing is more important to getting through this housing correction than the availability of mortgage finance.'
Said Scott Brown, chief economist at Raymond James & Associates in St Petersburg, Florida: 'One of the big problems we have is that there has been a lack of demand for debt. You have seen the market for securitised debt such as credit cards or student loans dry up completely.
'Here is the Fed taking a bunch of debt out of the market,' he said. 'It should help unblock the credit markets.'
The new mortgage- support facility was intended to strike at the collapsed housing market, the core of the US's economic woes.
'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 financial conditions more generally,' the Fed said.
Investor appetite for both the debt issued by Fannie Mae and Freddie Mac and the mortgage-backed securities they guarantee has dried up since the government seized the companies in September, and the Fed hopes to fill that void.
'They are getting to the heart of the problem, it's clean, it's quick, it's direct,' said Todd Abraham, co-head of government and mortgage bonds at Federated Investors in Pittsburgh, Pennsylvania. 'It's a good way to bring down mortgage rates.'
Under the consumer- finance facility, the Treasury will help cover any losses that the Fed might face by providing US$20 billion of credit protection from its US$700 billion financial bailout fund, which Congress approved last month.
A Treasury spokeswoman said that the US$20 billion will come from the remaining unallocated US$40 billion in the first tranche of the US$700 billion financial rescue fund. That leaves Treasury with US$20 billion; and once that is used, it must ask Congress for access to the remaining US$350 billion in the fund.
The Treasury noted that issuance of asset-backed securities in consumer lending categories such as credit cards, car loans and student loans had essentially ground to a halt in October.
Last year, issuance was roughly US$240 billion.
'Continued disruption in the ABS market could further deteriorate credit availability for consumers and increase the prospects for further deterioration in the economy generally,' the Treasury said in a statement.
The Fed's twin announcements marked the latest in a series of emergency measures by US authorities to try to keep the economy from falling into a deep and prolonged recession. Late on Sunday, the government stepped in to prop up the second largest US bank Citigroup.
Most economists said that the emergency steps represent a necessary, if ad hoc, response to the greatest financial shock the US has experienced since the Great Depression.
Some, however, are worried that the mounting costs of the measures, which have the potential to reach several trillion dollars, could eventually fuel a troubling inflation.
'It may mean (a) longer- run issue with inflation and inflation concerns,' said John Silvia, chief economist at Wachovia Securities in Charlotte, North Carolina. 'It may be too much of a good thing is a bad thing. We may be overpaying for bad assets.'
Policymakers, however, have signalled a willingness to do whatever it takes to try to tamp down the risk of a severe recession. -- Reuters, Bloomberg
No comments:
Post a Comment