Government Announces New Loan Programs

Hopes modifications will help raise slumping GDP

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Treasury Secretary Henry Paulson (Source: Treasury.gov)

To diminish the effect of a sluggish economy, the government announced two new programs today that it hopes will strengthen financial institutions and increase lending to consumers and businesses.

“The consumer asset-backed securities market is a source of liquidity to financial institutions that provide federally guaranteed small business loans and consumer lending such as auto loans, student loans, and credit cards,” said Treasury Secretary Henry Paulson at a news conference today.

However, “credit market stresses have led to a steep decline in the third quarter of 2008, and the market essentially came 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. This lack of affordable consumer credit undermines consumer spending and as a result weakens our economy.”

The Federal Reserve will purchase up to $100 billion in direct obligations from mortgage giants Fannie Mae and Freddie Mac as well as the Federal Home Loan Banks. The Fed also will purchase another $500 billion in mortgage-backed securities, pools of mortgages that are bundled together and sold to investors.

The Fed and the Treasury Department will also lend up to $200 billion to securities dealers and other financial firms that hold AAA-rated securities backed by consumer loans, such as credit cards and auto loans. The program will also cover loans originated by the Small Business Administration (SBA). The Treasury will provide $20 billion from the $700 billion economic bailout to cover potential losses from the program.
The new loans, announced as fresh economic data, are the latest modifications to the largest government bailout in history, a program designed to keep the financial system from pushing the country into a deep and prolonged recession.
The government is seeking to instill confidence in the credit markets, and is hoping to see lenders like credit card companies return to normal levels of lending to help stimulate the economy. Since September, financial institutions have been hesitant to lend money for fear they won’t be repaid.

If successful, the new programs will stimulate consumers and businesses, which the government hopes might push the country’s gross domestic product higher, and increase consumer confidence to help the crippled housing and auto markets.

Meanwhile, the Commerce Department revised reading on the economy’s performance showed gross domestic product shrank at a 0.5% in the third quarter, weaker than the 0.3% decline first estimated a month ago. It is the worst showing since the third quarter of 2001. GDP measures the value of all goods and services produced in the U.S. and is considered the best barometer of the country’s economic fitness.

Quarterly housing prices also dropped by 16.6% compared to the same period a year ago, reports the Standard & Poor’s/Case-Shiller U.S. National Home Price Index earlier this morning. This was the lowest price drop since the first quarter of 2004. Meanwhile, the

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