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Treasury Unveils New Plan To Bolster Markets

MICHELE NORRIS, Host:

From NPR News, this is All Things Considered. I'm Michele Norris.

MELISSA BLOCK, Host:

And I'm Melissa Block. Another day, another massive infusion. Today the Federal Reserve and the Treasury announced they would inject as much as $800 billion into the economy. That's $100 billion more than the original bailout plan. The money will go in two separate routes, both to free up lending for consumers, as NPR's John Ydstie reports.

JOHN YDSTIE: In a stunning exercise of its power, resources and independence, the Federal Reserve today committed more for the struggling economy than the controversial $700 billion TARP program authorized by Congress. And the Fed did it with two press releases barely two pages long and not a word from Fed chairman Ben Bernanke. In one press release, the Fed announced that it will buy up to $500 billion in mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac and other federally backed lenders. It also said the Fed will buy up a hundred billion in debt issued by the two mortgage giants. Treasury Secretary Henry Paulson said the Fed move is crucial to solving the housing crisis.

HENRY PAULSON: Nothing is more important to getting through this housing correction than the availability of affordable mortgage finance.

YDSTIE: Mark Zandi of moodyseconomy.com says he thinks the action could be effective.

MARK ZANDI: This is a good step. I think it'll bring down mortgage rates. The 30-year fixed mortgage rate, today is six percent. I think after this it'll be closer to five and half, and that'll make a big difference in terms of refinancing and in home sales. But it's not enough. I mean, I do think we need to have a comprehensive big mortgage mitigation plan to try to keep people in their homes and not going through foreclosure. So this is a good step, but it's not enough.

YDSTIE: Zandi also points out that, unlike the original idea for the $700 billion TARP program authorized by Congress, this Fed program will not be buying up toxic mortgage-backed securities. Securities the Fed will be buying will not include the subprime and exotic mortgages that are falling into foreclosure by the millions. These will be safe investments, Zandi says, and the Fed is unlikely to lose money on them. But, he says, the move does suggest the government takeover of Fannie and Freddie has not been as successful as had been hoped.

ZANDI: Everyone had hoped when Fannie and Freddie were nationalized that that would have brought down mortgage rates significantly. And mortgage rates are down. They're lower than they would have been otherwise, but they haven't come down as much as expected or as had been hoped for. And this is an effort to bring them down further.

YDSTIE: The other program the Fed announced today would inject $200 billion into the market for consumer loans, which has been frozen, says Zandi.

ZANDI: Many credit cards, vehicle loans, student loans, other consumer financial loans are packaged up and sold as securities to investors. It's really those investors that are providing the cash for those loans. But those investors aren't buying those securities now, and so those loans are getting increasingly difficult to make.

YDSTIE: So the Fed is stepping in and telling the banks and car companies who make those loans that it will lend them money so they can start making loans again. The Fed expects to get paid back, but there is some risk for taxpayers. So the Treasury is putting up $20 billion from the TARP program to absorb potential losses. But Secretary Paulson says it's necessary to boost the struggling economy.

PAULSON: The Federal Reserve facility will enable a broad range of institutions to step up their lending, enabling borrowers to have access to lower-cost consumer finance and small business loans.

YDSTIE: So, where is the Federal Reserve getting $800 billion? Well, it's just creating it. Printing it, you might say. It's adding more money to the overall money supply. That could be inflationary if the Fed doesn't skillfully remove the money from the economy once the crisis is over. But at this point everyone seems ready to take that risk. John Ydstie, NPR News, Washington. Transcript provided by NPR, Copyright NPR.

NPR transcripts are created on a rush deadline by an NPR contractor. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.

John Ydstie has covered the economy, Wall Street, and the Federal Reserve at NPR for nearly three decades. Over the years, NPR has also employed Ydstie's reporting skills to cover major stories like the aftermath of Sept. 11, Hurricane Katrina, the Jack Abramoff lobbying scandal, and the implementation of the Affordable Care Act. He was a lead reporter in NPR's coverage of the global financial crisis and the Great Recession, as well as the network's coverage of President Trump's economic policies. Ydstie has also been a guest host on the NPR news programs Morning Edition, All Things Considered, and Weekend Edition. Ydstie stepped back from full-time reporting in late 2018, but plans to continue to contribute to NPR through part-time assignments and work on special projects.
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