The Fed Buys Debt To Boost Credit
Tuesday, November 25, 2008SUSIE GHARIB: American consumers got an early holiday gift today from the Federal Reserve: two new programs designed to give them easier access to credit. The Fed will lend hundreds of billions of dollars to consumer finance companies so they will increase loans to consumers and small businesses. The central bank has committed even more taxpayer money to buy the debt and mortgage-backed securities of government entities such as Fannie Mae and Freddie Mac. In reaction, 30-year mortgages posted a record one-day drop of 1 1/8 percent to a rate of 4 7/8 percent. Washington bureau chief Darren Gersh has more on today's Fed actions.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: If you were looking for a reason to be thankful, the Federal Reserve offered two today. First the Fed announced it would buy $600 billion in debt and mortgage-backed securities issued by Fannie Mae and Freddie Mac. Fed officials say their goal is to boost credit and reduce the cost of buying a home. Mortgage expert Guy Cecala says the government is putting a huge amount of buying power to work.
GUY CECALA, CEO, INSIDE MORTGAGE FINANCE: They could buy the entire market and basically buy every new security Fannie Mae and Freddie Mac creates, leaving very little for anyone else to purchase, other investors. So the idea is that it would drive down mortgage rates and it should have immediate impact.
GERSH: The second reason to give thanks is a new Federal Reserve program to support consumer and small business lending. The Fed plans to lend $200 billion to help buyers of asset-backed securities like mutual funds and insurance companies. The Treasury now says it will absorb the first $20 billion and any loss the Fed may take. The assets include car loans, student loans and some small business loans. Banks fund those loans by packaging them together and selling them off, that is until last month when the market dried up completely. Treasury Secretary Henry Paulson sees an aggressive effort to revive that market.
HENRY PAULSON, TREASURY SECRETARY: Remember, that $200 billion is the starting point. It's going to take a while to get this program up and going and then it can be expanded and increased over time.
GERSH: Paulson says the program could ultimately be expanded to include commercial mortgages, though all the details of these programs can seem mind numbingly complex. Former Fed Governor Laurence Meyer says the overall goal is clear.
LAURENCE MEYER, VICE CHAIRMAN, MACROECONOMIC ADVISERS: You have the Fed going around virtually market to market and seeing where credit is clogged and what they can do to get that credit flowing again and so I think it's very significant.
GERSH: If you think that effort has been aggressive so far, Meyer says there's more to come. If necessary, the Fed could begin buying up jumbo mortgages, maybe even corporate loans.
MEYER: It doesn't want to be the total intermediator of credit throughout the economy, but it's moving in that direction.
GERSH: Indeed, the Fed is now approaching $3 trillion in all its various lending facilities. When all is said and done, Meyer wouldn't bet against that rising to $4 trillion. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
