Fed, Treasury Move to Boost Consumer Loans

Paulson Announces New Loan Programs

The government introduced a pair of new programs Tuesday that will provide $800 billion to help unfreeze the market for consumer debt which Treasury Secretary Henry Paulson calls vital to supporting the economy.

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The Federal Reserve and Treasury moved today to boost consumer spending and lower home mortgage rates, committing up to $800 billion to make it easier for households to borrow money for cars, tuition bills and new homes as part of a broad effort to rekindle economic growth.

The new program puts the balance sheet of the country's central bank behind two critical but troubled parts of the economy -- consumer spending and housing. It is largely separate from the $700 billion Troubled Asset Relief Program, administered by the Treasury Department and focused on shoring up the country's financial system.

On a day when the Commerce Department announced that the economy contracted more quickly from July through September than initially estimated, Treasury Secretary Henry M. Paulson Jr. said the slowdown made it necessary for the Federal Reserve and Treasury to intervene to boost the "real" economy, just as they did to stabilize banks and financial companies.

"As the economy is turning down, it is very important that lending be available to consumers," Paulson said. "What we are doing is support consumer lending."

A Treasury news release noted that in 2007, about $240 billion in car, student and other consumer loans had been packaged by the companies that issued them into larger securities and sold to investors, who then benefit from the flow of payments from borrowers. That system of packaging and reselling loans keeps money flowing to banks and other lenders, allowing them to make even more money available to consumers.

However it all but stopped over the past two months, leading to rising interest rates, a downturn in lending -- and a risk that economic growth could be dragged down even further.

The Fed said it would provide up to $200 billion to investors who put the money toward consumer loans in the form of credit cards, auto loans and student loans, as well as some forms of small business lending.

The one-year, non-recourse loans are available only for newly issued consumer debt, and are meant to ensure that banks and other institutions remain willing to lend to creditworthy consumers.

The market for those loans "declined precipitously in September and came to a halt in October," the Fed said in a news release this morning. "Continued disruption of these markets could significantly limit the availability of credit to households and small businesses and thereby contribute to further weakening of U.S. economic activity."

The Fed's consumer lending program is partially backed by $20 billion from the TARP, which will be used to absorb losses on the program up to that amount. The Fed loans to investors will earn interest and also a fee from those who take advantage of it.

Paulson said the initial $200 billion "is a starting point" and could grow over time.

In addition to consumer spending, the Fed announced it would buy up to $100 billion in mortgages held by Fannie Mae, Freddie Mac and the Federal Home Loan Bank in an effort increase the flow of money into the housing markets and lower interest rates. The Fed will also buy another $500 billion in bundles of mortgage-backed securities issued by the agencies.