Fed throws lifeline to home buyers

According to this Reuters article, the Fed announced a new rescue package of $800 billion USD to lower the cost of home purchases, credit card and student loans.

Under the new mortgage program, the Fed will buy up to $100 billion of debt issued by government-sponsored mortgage enterprises Fannie Mae, Freddie Mac and the Federal Home Loan Banks.

It will also buy up to $500 billion of mortgage securities backed by Fannie Mae, Freddie Mac, and Ginnie Mae.

The central bank also launched a $200 billion facility to support consumer finance, including student, auto, and credit card loans and loans backed by the federal Small Business Administration. This will lend to investors who hold securities backed by this debt.

Great news, although somewhat anticipated by Paulson's change of heart in the direction of the spending of the previous $700 billion USD bailout plan.

Under the current ominous economic conditions, one could almost say, that no one is willing to lend. It's not worth the return on the interest rate —nor any other compensation—, to risk losing it all. Or, lenders are asking themselves: how will borrowers be able to pay back their loans if the economy is spiraling down out of control? 

So, the Fed is playing its role as lender of last resort, lending to Freddie and Fannie, and any lender guaranteed by them, which in turn provide the mortgage funds  to homeowners. It is also buying (or lending to) credit card, student, car and consumer loans, guaranteed by the SBA.

It is a step in the right direction, which I whole-heartedly support, the Fed has to reach the final consumer to stimulate the economy. There will be no trickle down, whilst the intermediaries are too afraid to lend, and are much too worried covering their huge wrong sided derivatives positions.

It also makes sense to bailout the consumer, he carries the weight of 2/3 of our GDP growth, he has the power to jump-start the economy, unlike financial institutions which are proving to be a stumbling block under the current environment.

We must also expect the government to step up its fiscal stimulus by building and repairing  US infrastructure, which happens to be in dire need of TLC.