Bailout increases by $800 billion

• Article
• Comments ()
• Click-2-Listen
• Videos

By David M. Dickson

The federal government expanded its financial-rescue effort by another $800 billion Tuesday to encourage more lending to home buyers and consumers, bringing the national bailout tab to $1.5 trillion and counting.

The surprise move is the latest indication that the U.S. economy is headed sharply downward and that the original $700 billion bailout plan was not nearly enough to break up the nation's credit logjam.

The program introduced Tuesday by Treasury Secretary Henry M. Paulson Jr. would commit $600 billion to assist the mortgage markets, and a second program would provide $200 billion of increased lending to consumers. Both would be operated by the Federal Reserve and do not need congressional approval.

The federal government introduced the programs as new reports revealed that home prices continued their precipitous decline in September and household spending plunged in the last quarter by the largest amount since 1980.

"The U.S. recession is set to get worse — a lot worse — in the next couple of quarters," said Nariman Behravesh, chief economist for IHS Global Insight.

The Fed announced that it would purchase from investors up to $500 billion in mortgage-backed securities that were packaged and guaranteed by mortgage-financing giants Fannie Mae, Freddie Mac and Ginnie Mae. The central bank will also buy up to $100 billion in debt issued by Fannie, Freddie and the Federal Home Loan Banks.

"This is what should have been done by Treasury when it got the [$700 billion] Troubled Asset Relief Program (TARP) approved in early October," said Vincent Reinhart, a former senior economist at the Fed who is now a scholar at the American Enterprise Institute for Public Policy Research. Instead, he said, Treasury got distracted by its program to infuse capital into banks.

"As markets deteriorated, the capital that Treasury put in the front door leaked out the backdoor," Mr. Reinhart said.

None of the $600 billion used to purchase this debt or these mortgage-backed securities will come from TARP. "However, the amount of resources committed by the government has increased by $600 billion, and it does represent credit risk to the taxpayer. They're just using the Fed's balance sheet," Mr. Reinhart said. Essentially, the Fed is creating money to finance its purchase of mortgage-backed securities and Fannie and Freddie debt.

The additional risk assumed by the taxpayer is somewhat limited by the fact that the government had already effectively guaranteed the mortgage securities backed by Fannie and Freddie.