US Fed announces $800bn stimulus

Henry Paulson announces the stimulus package

The Federal Reserve is to inject another $800bn (£526.8bn) into the US economy in a further effort to stabilise the financial system.

US Treasury Secretary Henry Paulson said the stimulus package aimed to make more lending available to consumers.

About $600bn will be used to buy up mortgage-backed securities while $200bn is being targeted at unfreezing the consumer credit market.

Financial institutions are reluctant to lend, deepening the economic slowdown.

The situation has been exacerbated as the credit crisis has worsened.

Meanwhile US President-elect Barack Obama said budget reform was “imperative” with the economy in crisis.

“It is not an option. It’s a necessity,” he said.


Key lending such as credit cards, car loans and student loans had essentially come to a halt in October, Mr Paulson said. He added that the new measures were aimed at getting these types of lending back to more normal levels.

“It will take time to work through the difficulties in our market and our economy and new challenges will continue to arise,” he said.

They are getting to the heart of the problem, it’s clean, it’s quick, it’s direct

Todd Abraham, Federated Investors

“We are committed to using all the tools at our disposal to preserve the strength of our financial institutions and stabilise our financial markets to minimise the spill-over into the rest of the economy.”

The announcement came as Commerce Department figures showed US economic output shrank between July and September at a faster pace than initially predicted, which the White House described as “troubling”.

GDP fell at an annual rate of 0.5% in the third-quarter – from the 0.3% estimated a month ago – as consumers cut spending by the largest amount in 28 years.

“This is why we are having to take such bold actions,” a White House spokeswoman said.

Meanwhile, the Standard & Poor’s/Case-Shiller national home price index slumped by a record 16.6% during the quarter from the same period a year ago – taking prices down to levels not seen since early 2004.

Bail-out details

Under the latest rescue plan – which is in addition to the already-announced $700bn bank bail-out – the Fed is to buy up to $100bn in debt from the troubled mortgage giants Fannie Mae and Freddie Mac.

The central bank said it would also buy another $500bn in mortgage-backed securities – pools of mortgages that are bundled together and sold to investors.

The Fed said that the $600bn effort to support the mortgage market was being taken to reduce the cost of home mortgages and increase their availability.

It said the purchases of the mortgages and mortgage-backed securities would take place over a number of months.

In addition to the $600bn effort on mortgages, the Fed also unveiled a separate programme to help unfreeze the consumer debt market.

The central bank said it would lend up to $200bn to the holders of securities backed by various types of consumer loans, such as credit cards and student loans.

Analyst reaction

News of the latest massive financial rescue plan was generally welcomed.

“They are getting to the heart of the problem, it’s clean, it’s quick, it’s direct. It’s a good way to bring down mortgage rates, because at the end of the day they have to stabilise the housing market,” said Todd Abraham of Federated Investors, Pittsburgh.

Robert Macintosh, chief economist with Eaton Vance, Boston, said: “If they can pull it off it’ll make some people happy, but I don’t know how effective it’ll actually be.”

Scott Brown, chief economist at Raymond James Associates, Florida, said: “Here is the Fed taking a bunch of debt out of the market, which doesn’t hurt. I think it should it should help unblock the credit markets.”

The severe financial crisis that is rocking global markets at the moment began more than a year ago with rising defaults on sub-prime mortgages, loans provided to borrowers with weak credit histories.

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