U.S. moves to thaw credit for consumers

The use of Fed resources also gets around another problem Treasury faced: a limited amount of money in the program. The $800 billion being committed to buy mortgage-related assets and other assets backed by consumer loans will come from the Federal Reserve’s vast resources. It will not count against the $700 billion rescue program.

The Treasury Department also announced Tuesday that the rescue program had spent another $2.91 billion in direct purchases of stock from 23 regional banks around the country. These institutions ranged from HF Financial Corp. in Sioux Falls, S.D., to Centerstate Banks of Florida Inc. in Davenport, Fla.

The government has now injected $161.5 billion in 53 institutions. The goal is to spend $250 billion of the $700 billion bailout fund to buy bank stock as a way of encouraging banks to resume more normal lending to bolster the shaky economy.

A boost to the overall economy is considered vital at a time when nearly every day has brought further evidence that the country is sliding into a severe downturn.

Nariman Behravesh, chief economist at IHS Global Insight, said he thought the economy would shrink by an even more drastic 4 percent annual rate in the current quarter and keep falling through the middle of 2009.

“We are in the early stages of one of the worst recessions in the postwar period, even factoring in a massive stimulus program,” Behravesh.

Obama is putting together a stimulus program with the goal of creating 2.5 million jobs over the next two years. It’s an effort that many economists think will need to total between $500 billion and $700 billion to bring the benefits needed to help shore up the economy.

Obama pledged Tuesday to make deficit reduction a goal of his administration — but only after recovery from the financial crisis is well under way. “We are going to have to jump start the economy,” he said.

At a news conference, Obama claimed a “mandate to move the country in a new direction,” and promised to consult with Republicans as he goes about it.

The effort to restart the frozen market for securities that back consumer debt will get an assist from the government’s $700 billion financial rescue fund, which Congress passed on Oct. 3. Paulson told reporters that the fund will supply $20 billion as protection for the Fed against losses in its purchases of securities for the program.

He also signaled that the program could be expanded to include asset-backed paper that covers commercial mortgage loans. Those loans are used to finance shopping malls and office buildings.

Paulson defended the administration against charges that it has made haphazard changes in the financial rescue program, sending confusing signals to markets. Initially, the effort was sold to Congress as a way to buy toxic mortgage-related assets off the books of financial institutions. The idea was to give them the capital needed to resume more normal lending.

When the financial crisis worsened and Paulson decided it would take too long to get the toxic purchase program operating, he switched to making direct purchases of bank stock with the rescue funds. Paulson announced that the first $350 billion installment of the rescue fund probably would not be used to buy any toxic assets.

“It is naive for any of us to think that when you are dealing with a situation of this magnitude that a bill could be passed or a single action taken to make all the issues go away,” Paulson told reporters at a briefing.

Paulson declined to say whether the Bush administration would seek authority from Congress to tap a portion of the second half of the $700 billion fund before leaving office. That decision had not yet been made, he said.

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