Fed And Treasury To The Rescue. Again.

Fed And Treasury To The Rescue. Again.

Brian Wingfield

Paulson and company act to stimulate lending to consumers.

• The Fed's Buying Spree
• Stocks Waffle On Fed Move
• Text: Paulson's Remarks On Consumer Lending Plan

WASHINGTON, D.C.--U.S. government officials have created a new way to unclog credit markets without having to dip deeply into the $700 billion set aside to bail out financial firms.

The answer: Allow the Federal Reserve to loan vast sums of money with the Treasury's backing.

Under a plan announced Tuesday, the Fed will issue as much as $200 billion in one-year loans to holders of new, top-rated, asset-backed securities in an effort to boost consumer lending. The idea is to give banks more liquidity so they can make auto loans and student loans and issue credit cards. The market for these securities in the consumer category was about $240 billion in 2007, but due to the credit crunch, it virtually disappeared in October 2008.

The Treasury will use $20 billion from the $700 billion pool in the Troubled Asset Relief Program (TARP) to guarantee the loans. In a press conference Tuesday morning, Treasury Secretary Henry Paulson called the new lending facility a "starting point" for further government lending. He says the program could be expanded over time to include commercial mortgage-backed securities, certain residential mortgage-backed securities and other assets.

It's also an indication that the government doesn't have nearly enough ammunition to deal with the economic crisis as it previously thought. Nearly two months ago, Congress granted the Treasury secretary extremely broad authority when it established the $700 billion TARP, with the understanding that the government would buy toxic securities from firms. Earlier this month, Paulson announced that the funds would be used to inject capital into financial institutions. Now, the government plans to use at least a portion of the funds to backstop lending by the Fed. 

he announcement Tuesday seems to indicate that Uncle Sam will continue its ad hoc approach to dealing with the crisis. Paulson says it's "naive for any of us to think that when you're dealing with a situation of this magnitude that a bill could be passed or a single action could be taken" to dig the U.S. out of its economic rut.

In a separate action designed to kick-start the housing market, the Fed also announced Tuesday that it is beginning a new program to buy $100 billion in direct obligations of government-controlled mortgage buyers Fannie Mae (nyse: FNM - news - people ), Freddie Mac (nyse: FRE - news - people ) and the Federal Home Loan Banks. It will also buy up to $500 billion in mortgage-backed securities from Fannie, Freddie and the Government National Mortgage Association (Ginnie Mae).