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U.S. tackles consumer debt market

A Fed plan will pour billions into the risky world of credit cards, student and auto loans, and business financing.

November 26, 2008|Jim Puzzanghera AND Tiffany Hsu | Puzzanghera and Hsu are Times staff writers.

LOS ANGELES AND WASHINGTON — The federal government's new $800-billion initiative to revive the nation's credit markets and reverse the deepening economic crisis propels the government into risky territory -- the uncertain world of credit cards, student borrowing, auto loans and cash-strapped small businesses.

Most of the money in the plan announced Tuesday is aimed at making home loans cheaper and more readily available. To that end, the Federal Reserve plans to buy as much as $600 billion in debt and mortgage-backed securities held or issued by government-sponsored lenders such as Fannie Mae and Freddie Mac.

But on a separate front, the Fed will commit as much as $200 billion to help loosen lending for consumer goods, including everything people can buy with their credit cards. The move is intended to make it easier for ordinary Americans to get credit, but it also carries greater risk that tax dollars might not be repaid.

In part, that's because as federal officials reach further out for ways to ease the credit freeze-up that's hogtying the overall economic recovery, they have little choice but to adopt strategies carrying greater risks.

"They have to reach further and further out on that risk scale in order to have any effect because what they've done so far . . . hasn't solved all the problems," said Timothy Yeager, a finance professor at the University of Arkansas and a former Federal Reserve economist.

Also, because credit card debt and student loans are largely unsecured -- unlike home loans or auto purchases, which have tangible assets behind them -- they represent a higher risk that the money might not be repaid.

Despite the risk, the move was necessary, said Sen. Charles E. Schumer (D-N.Y.), who has been pushing the administration to take actions to loosen credit for student, car and small-business loans.

"The arteries of the financial system are still clogged, and as a result, too much of the economic activity on Main Street is slowing to a crawl," he said.

Many working people can't get the credit they need, said Richard Pittman, a counselor with the nonprofit ByDesign Financial Solutions, which offers personal credit counseling in Los Angeles.

"We're crossing our fingers that this will work," he said. "If we don't get the market moving again, the biggest industry is going to be soup lines."

Credit card companies have not only increased interest rates on outstanding balances but also rolled back credit limits for many consumers, said Travis Plunkett, legislative director for the Consumer Federation of America.

"Credit card companies can suddenly and sharply double or triple your interest rate on the existing balance. What kind of effect does that have on a household that is barely making it?" Plunkett said.

Federal officials said they would reduce the risk to taxpayers by covering only securities with the highest ratings. Those securities would contain new or recently issued loans that reflect the higher lending standards of the current crisis.

Treasury Secretary Henry M. Paulson said the aim was to get money flowing again to allow people to buy homes and cars, to attend college and to expand their small businesses.

The market for securities backed by such lending declined sharply this summer, and all but dried up in October.

"As a result, millions of Americans cannot find affordable financing for their basic credit needs. And credit card rates are climbing, making it more expensive for families to finance everyday purchases," Paulson said. "This lack of affordable consumer credit undermines consumer spending [and] as a result weakens our economy."

The federal action sent both the Dow Jones industrial average and the Standard & Poor's 500 index higher for a third straight day, the first time that has happened in more than two months. The tech-laden Nasdaq index declined.

The consumer program, in the form of loan guarantees to holders of highly rated, consumer-asset-backed securities, will be run by the Federal Reserve. Paulson stressed that it would take a while to get underway and that the program could grow over time.

The Treasury Department will cover up to $20 billion in losses with money from the federal government's $700-billion financial rescue fund.

"The problem is the market is so wary of asset-backed securitizations that people aren't willing to buy," said Jaret Seiberg, a financial services analyst with Stanford Group Co.

David Resler, chief economist for Nomura Securities, said that the government was taking steps to reduce risk and that the program was big enough to help loosen credit in the $2.6-trillion consumer credit market.

"It essentially ensures an investor market for these new loans," he said. "It will help."

Car dealers, struggling with the worst sales market since 1991, welcomed the federal aid and the prospect of lower rates for car loans.

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