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."
