Fed, Treasury Announce Plan to Jumpstart Lending

The Federal Reserve and Treasury Department on Tuesday unveiled hundreds of billions more in money they are pumping into the struggling U.S. economy, trying to jumpstart lending by the nation’s banks for mortgages and consumer debt.

Together, the programs from the Federal Reserve and the New York Fed aim to dump $800 billion in additional funds into the struggling U.S. economy, more than Congress approved in October for a bailout of the nation’s banks and Wall Street firms.

The NATIONAL ASSOCIATION OF REALTORS® said the actions will free up money on main street and lower long-term interest rates, which in turn will boost home sales.

“This is great news for home buyers and sellers and we applaud the Fed for taking this historic step,” said NAR President Charles McMillan. “Housing recovery is the key to economic recovery in this country and it always has been.” (Read the full NAR statement.)

Under the plan, the Federal Reserve announced it will purchase up to $500 billion in mortgage-backed securities that have been backed by Fannie Mae, Freddie Mac, and closely held Ginnie Mae, the three government-sponsored mortgage finance firms set up to promote homeownership. It 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.

By putting money in the hands of holders of consumer and mortgage loan securities, the government hopes more money will flow to consumers than has occurred so far in previous bailout plans.

The moves came as the Commerce Department announced that gross domestic product, the broad measure of the nation’s economy, fell at an annual rate of 0.5% in the third quarter, the biggest drop in economic activity in seven years. Economists believe that the economy is likely to continue to contract in the current quarter and into early next year.

Source: Chris Isidore, CNNMoney.com (11/25/08), NAR

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Fed Survey Reports Banks Tightening Credit

The Federal Reserve reported Monday that its quarterly survey of lending found 95 percent of banks said they had tightened lending standards on some loans.

Business and credit card lending was most affected. However, the survey reported that banks have adopted tighter standards for all kind of loans, including mortgages.

The survey was taken during the first two weeks of October, so its results don’t reflect government efforts to loosen credit.

Source: The Associated Press (11/03/2008)

Read the article here.

World Leaders Take Big Steps Against Credit Crunch

Government leaders in the U.S. and abroad took big steps this weekend to battle the financial ‘flu’ that has spread across the globe.

In an effort to thaw the credit crunch, Europe’s euro-backed countries decided Sunday to guarantee bank refinancing through the end of 2009 and took measures to prevent more banks from failing. Fifteen European leaders met in an emergency meeting in Paris on Sunday to address the crisis, aiming to help bolster banks’ confidence in lending with one another and get credit flowing once again.

While no sum was given on how much the efforts would cost, French President and summit host Nicolas Sarkozy said each nation would determine how much to spend and implement the measures.

"I want to tell our compatriots in all the countries of Europe that they can and should have confidence," he said.

At the same time, the World Bank announced Sunday it will work to develop and strengthen the economies of developing countries. At a joint news conference with Dominique Strauss-Kahn, head of the International Monetary Fund, World Bank President Robert Zoellick said Sunday that any extended contraction of credit could cause further turmoil in developing countries’ ability to provide for their citizens, who already face high energy and food prices.

Zoellick called for a revamping of the global economic system to ensure that a financial crisis of this level “never happens again.”

International efforts to stem the credit crisis reached a peak on Wednesday, as central banks made an unprecedented decision to take a coordinated interest rate cut. The move came during a week in which global markets suffered some of their worst losses on record.

As finance leaders from the Group of Seven (or G7) met Friday to come up with a unified plan to battle the credit crunch, Treasury Secretary Henry Paulson announced that the U.S. government will buy an ownership stake in some of the nation’s private financial institutions – a move not seen since the Great Depression.

“This is a period like none of us has ever seen before,” Paulson said in a news conference late Friday.

Read the story here.

U.S. launches all-out attack on credit crisis

By Patrick Rucker and Kevin Drawbaugh

WASHINGTON (Reuters) - The United States surged into action on Friday to launch an all-out attack against the worst financial crisis since the Great Depression, readying a plan to tap hundreds of billions of dollars in taxpayer funds to buy up toxic mortgage-related debt.

Capping a week that has reshaped Wall Street, Treasury Secretary Henry Paulson urged Congress to quickly agree on a program for huge purchases of bad debts held by banks and other financial institutions.

Lawmakers promised fast action on the plan, which two banking industry sources put in the $500 billion to $800 billion range.

Losses on mortgage-related debts have choked the financial system, forced lenders into bankruptcy and led the economy to what President George W. Bush called a “pivotal” moment.

“America’s economy is facing unprecedented challenges, and we are responding with unprecedented action,” Bush told reporters in the White House Rose Garden.

After having taken a series of other emergency steps that failed to erect a firewall against the spreading credit turmoil, U.S. authorities turned their attention to the underlying problem — the rising tide of bad mortgage debt.

Paulson offered few details on Treasury’s proposal but said he would work through the weekend and next week with Congress to get a program put in place. The proposal being sent to lawmakers would run only a few pages, a source said. A congressional aide said staff on Capitol Hill would be briefed on the plan on Saturday morning.

Rep. Steny Hoyer, the Democratic leader in the House of Representatives, said the chamber would likely take up a bill to implement the program early next week. House Speaker Nancy Pelosi said lawmakers would stay in town past their hoped-for adjournment next Friday if needed to pass it.

Read the rest of the article here.