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Fed moves to revive lending
The Federal Reserve on Tuesday launched its long-awaited program for reviving moribund markets for consumer and small-business loans.
The program aims to use $200 billion from the Treasury’s bank-bailout fund to spark as much as $1 trillion in new loans for small businesses and for consumers who need to use their credit cards, buy cars and finance college education.
Markets where those loans were securitized and sold to investors have been dead since the fall. The Fed under the new program will attempt to revive investor interest in the securitized loans by purchasing recently made loan-backed securities from investors, enabling them to go out and purchase newly made loan instruments from banks.
When the markets collapsed last fall, banks lost their ability to sell new loans to investors, forcing them to hold loans on their books and making them more cautious about lending to consumers and businesses. The new program aims to break that vicious cycle, which has led to the biggest credit crunch in modern times.
“These markets have historically been a critical component of lending in our financial systems, but they have been virtually shuttered since the worsening of the financial crisis in October,” the Fed and Treasury said in a joint statement.
“By opening these markets, the [program] will assist lenders in meeting the borrowing needs of consumers and small businesses, helping to stimulate the broader economy.”
While many consumers and businesses have complained of trouble getting loans, banks say the demand for loans also has dropped dramatically because of the deep recession.
Federal Reserve Chairman Ben S. Bernanke held out hope in an appearance on Capitol Hill Monday that the program will work to revive lending. Ultimately, he said, the recovery of the economy may depend on the success of such lending-revival efforts.
Steven Goldman, chief market strategist with Weeden & Co., of Greenwich, Conn., said the success of the Fed’s program depends on whether consumers and small businesses will take advantage of these loans at a time of increasing joblessness and worries about whether people will stay employed.
The program “is going forward,” he said, “but what interest there will be from the private sector, we still don’t know yet.”
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