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Bailout cost builds, could hit $7 trillion

Fed sets sights on jammed-up consumer credit

WASHINGTON – Rolling out powerful weapons against the financial meltdown, the Bush administration and the Federal Reserve pledged $800 billion Tuesday to blast through blockades on credit cards, auto loans, mortgages and other borrowing.

Total bailout commitments, loans and pledges of backing neared a staggering $7 trillion.

Treasury Secretary Henry Paulson, who has been criticized for constantly revising the original $700 billion rescue program, said the administration was considering more changes.

Millions of Americans rely on the kinds of loans that were targeted in one of the programs announced Tuesday.

The Federal Reserve will buy $200 billion in securities backed by different types of debt including credit card loans, auto loans, student loans and loans to small businesses. That market essentially froze in October. These types of loans as a result have become more difficult to obtain and have carried higher interest rates.

The Fed also announced that it would spend $500 billion to purchase mortgage-backed securities guaranteed by mortgage giants Fannie Mae and Freddie Mac and $100 billion more to directly purchase mortgages held by Fannie, Freddie and the Federal Home Loan Banks.

This would greatly expand an initial modest effort announced in September in which Treasury spent $26 billion to purchase mortgage-backed securities. The credit crisis was triggered by soaring losses on securities backed by subprime loans.

The announcement of the programs had an immediate positive effect on credit markets Tuesday, sending demand up and rates lower. Analysts predicted the program could send mortgage rates down by as much as one-half to a full percentage point in coming months, helping to spur demand in the beleaguered housing market, which is suffering its worst downturn in decades.

The programs to buy mortgage-related assets and securities backed by consumer debt have the same aim: to boost demand for those assets. In doing so, the government hopes to lower the costs being charged for consumer loans. That would make loans on everything from mortgages to cars more available.

The latest federal moves raised U.S. commitments to contain the financial crisis to nearly $7 trillion – although no one thinks the government will actually spend anything like that figure, which would be almost half the nation’s gross domestic product.

In the case of the Federal Reserve, the amount covers huge loans that financial institutions will have to pay back. In the case of the Treasury rescue effort, the government will at some point sell the stock it owns back to the banks, presumably when the banking system is doing better and the stock will be worth more.

As for Tuesday’s actions, the mortgage-backed securities the Fed will buy will be investment-grade assets.

By focusing on investment-grade securities, the Fed will be able to help provide a functioning secondary market. It will pay the prices for these securities that are being set by the market. Had the Fed needed to buy bad assets, it would have had to develop a mechanism to properly price assets that weren’t being traded.

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 an additional $2.91 billion in direct purchases of stock from 23 regional banks around the country.

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.