In a bid to calm markets and boost consumer confidence, the U.S. Federal Reserve and Treasury Department pledged $800 billion US to help boost the flow of lending for mortgages, students, cars, credit cards and small businesses.
The U.S. government will buy $100 billion in direct obligations from housing-related, government-sponsored enterprises, including Fannie Mae, Freddie Mac and the Federal Home Loan Banks. The government will also buy $500 billion in mortgage-backed securities.
The remaining $200 billion will be lent to holders of highly rated asset-backed securities supported by newly and recently issued consumer and small business loans. The goal is to provide greater demand for these securities as a way of lowering interest rates and to make these loans more available.
The $200-billion portion of the plan will be supported by $20 billion in credit protection taken from the $700-billion government rescue fund.
Key markets for consumer debt such as credit cards, auto loans and student loans essentially came to a halt in October, said Treasury Secretary Henry Paulson at a news conference announcing the new measures.
"This lack of affordable consumer credit undermines consumer spending [and] as a result weakens our economy," said Paulson.
"By providing liquidity to issuers of consumer asset-back paper, the Federal Reserve facility will enable a broad range of institutions to step up their lending, and enabling borrowers to have access to lower-cost consumer finance and small-business loans."
Retailers cutting prices
U.S. consumers have tightened their purse strings as credit becomes harder to access and the economy stalls.
The Conference Board announced in October that its consumer confidence index was at 38, its lowest level since the New York-based business think-tank began tracking shoppers in 1967.
However, the Conference Board's November reading, released Tuesday, indicated a bump in consumer confidence, with the index standing at 44.9. Still, the November figure is about half of what it was a year ago, and hovers around levels not seen since December 1974, when the index was 43.2.
U.S. retailers have already begun cutting prices in anticipation of a difficult Christmas shopping season.
Tuesday's action is the latest effort by the government to dissolve a hardening credit clog that has badly hurt the economy.
Since the financial meltdown accelerated in September, credit card issuers have been tightening their standards. A survey released Nov. 3 by the Federal Reserve found that 60 per cent of banks that responded said they had tightened lending standards on credit card debt.
President-elect Barack Obama named on Monday the people who will be in charge of getting the economy back on track, including Timothy Geithner, who will succeed Paulson as treasury secretary.
Obama also stressed on Monday that an economic stimulus package was urgently required, but he provided few details.
On Tuesday, Obama named Congressional budget office chief Peter Orszag as his pick for White House budget director, and called for a "line-by-line" review of federal spending. Staff director of the House Appropriations Committee Rob Nabors will act as the deputy budget director, Obama said Tuesday.
The two will be responsible for drawing up a budget for the incoming administration.