MercoPress. South Atlantic News Agency

Fed to inject another 800 b. to unfreeze credit market

The US Federal Reserve is to inject another 800 billion US dollars into the US economy in a further effort to stabilise the financial system. US Treasury Secretary Henry Paulson said the stimulus package aimed to make more lending available to consumers.

About 600 billion will be used to buy up mortgage-backed securities while 200 billion is being targeted at unfreezing the consumer credit market. Financial institutions are reluctant to lend, deepening the economic slowdown. The situation has been exacerbated as the credit crisis has worsened. Meanwhile US President-elect Barack Obama said budget reform was "imperative" with the economy in crisis. "It is not an option. It's a necessity," he said. Key lending such as credit cards, car loans and student loans had essentially come to a halt in October, Mr Paulson said. He added that the new measures were aimed at getting these types of lending back to more normal levels. "It will take time to work through the difficulties in our market and our economy and new challenges will continue to arise," he said. "We are committed to using all the tools at our disposal to preserve the strength of our financial institutions and stabilise our financial markets to minimise the spill-over into the rest of the economy." The announcement came as Commerce Department figures showed US economic output shrank between July and September at a faster pace than initially predicted, which the White House described as "troubling". GDP fell at an annual rate of 0.5% in the third-quarter - from the 0.3% estimated a month ago - as consumers cut spending by the largest amount in 28 years. "This is why we are having to take such bold actions" a White House spokeswoman said. Meanwhile, the Standard & Poor's/Case-Shiller national home price index slumped by a record 16.6% during the quarter from the same period a year ago - taking prices down to levels not seen since early 2004. Under the latest rescue plan - which is in addition to the already-announced 700 billion bank bail-out - the Fed is to buy up to 100 billion in debt from the troubled mortgage giants Fannie Mae and Freddie Mac. The central bank said it would also buy another 500 billion in mortgage-backed securities - pools of mortgages that are bundled together and sold to investors. The Fed said that the 600 billion effort to support the mortgage market was being taken to reduce the cost of home mortgages and increase their availability. It said the purchases of the mortgages and mortgage-backed securities would take place over a number of months. In addition to the 600 billion effort on mortgages, the Fed also unveiled a separate program to help unfreeze the consumer debt market. The central bank said it would lend up to 200 billion to holders of securities backed by various types of consumer loans, such as credit cards and student loans. News of the latest massive financial rescue plan was generally welcomed. (BBC).-