US commits US$800b to unfreeze credit markets

 

WASHINGTON: The US government, still struggling to manage a severe financial crisis, unveiled two new programmes yesterday that will provide US$800 billion to try to help unfreeze the market for consumer debt from home mortgages to credit cards.

The announcements by the Federal Reserve (Fed) and the Treasury Department represented the latest modifications to the largest government bailout in history, a programme designed to keep the troubled financial system from dragging the country into a deep and prolonged recession.

Under the new mortgage programme, the Fed will buy up to US$100 billion of debt issued by government-sponsored mortgage enterprises Fannie Mae, Freddie Mac and the Federal Home Loan Banks. It will also buy up to US$500 billion of mortgage securities backed by Fannie Mae, Freddie Mac, and Ginnie Mae.

The central bank also launched a US$200 billion facility to support consumer finance, including student, car, and credit card loans and loans backed by the federal Small Business Administration. This will lend to investors who hold securities backed by this debt.

“They’re trying to put funds into the system, trying to unfreeze these markets,” said William Poole, the former St. Louis Fed president, in an interview with Bloomberg Television.

Data released yesterday provided further proof the US is almost certainly in the throes of a painful recession.

The Commerce Department’s updated reading on the economy showed gross domestic product shrank at a 0.5 per cent annual rate in the July-September quarter, weaker than the 0.3 per cent decline first estimated a month ago, and the worst showing since the third quarter of 2001.

Meanwhile, the Standard & Poor’s/Case-Shiller national home price index tumbled a record 16.6 per cent during the quarter from the same period a year ago.

Elsewhere, the New York-based Conference Board said its Consumer Confidence Index for November rose to 44.9, from a revised 38.8 in October. Last month’s reading was the lowest since the research group started tracking the index in 1967.

However, American consumers — the lifeblood of the economy — slashed spending in the third quarter at a 3.7 per cent pace. That was deeper than the 3.1 per cent cut initially reported and marked the biggest reduction since the second quarter of 1980, when the country was in the grip of recession.

Underscoring the strain faced by consumers, the report showed that Americans’ disposable income fell at an annual rate of 9.2 per cent in the third quarter, the largest quarterly drop on records dating back to 1947. — Agencies