US pumps $800 billion in new lending programs

Henry PaulsonIn the latest of the gigantic efforts by the US authorities to revive the nation's crippled banking system, the Federal Reserve and the Treasury announced on Tuesday a pumping of $800 billion in new lending programs.

Confirming a rapidly deteriorating outlook, the announced move exceeds the $700bn troubled asset relief program that performed a taxpayer-backed rescue on the US banking system. According to economists, it also underlines how the credit crisis has spread from the corporate to the consumer sphere.

US treasury secretary, Henry Paulson, announced plans to pump $200bn into the consumer credit market underpinning car loans, student loans, credit cards and loans to small businesses, which effectively dried up in October. The Federal Reserve, the US central bank, also announced that it will buy up to $600bn worth of mortgage-backed assets that may free up the mortgage lending market, and hopefully bring down the cost of home loans.

The new programs also represent a new level of commitment by the Federal Reserve. Instead of trying to strengthen the economy by reducing short-term rates, the Fed is now pumping vast amounts of money directly into anything it believes needs help. Moreover, the new actions are unlikely to be the last - Fed officials are prepared to print as much money as needed to jump-start lending, consumer spending, home buying and investment, until the economy begins to turn around.

However, Laurence H. Meyer - a former Fed governor who is now vice chairman of Macroeconomic Advisers - has cautioned that even as the two new programs are massive, they will merely reduce the pain that lies ahead, and not eliminate it completely.

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