"The credit market has maybe slowly started to thaw, but this package will help unfreeze it more quickly," said John Sackrison, executive director of the Orange County Automobile Dealers Assn. "It's great news for consumers and auto dealers alike."
The new government initiatives came as President-elect Barack Obama continued his preparations to take office, promising to cut wasteful government spending as the country gears up for a major economic stimulus package.
Only last week, Paulson seemed to indicate the administration would leave any major new initiatives to Obama's incoming economic team.
But Tuesday, with fresh signs of deeper economic trouble, Paulson vowed to keep devising ways to combat the crisis until he handed off the baton in January.
"Well, I tell you, I am going to run right to the end, OK?" Paulson told reporters. "And we're going to continue to develop programs, deploy them when they're ready to go and work on having a very seamless, very seamless transition here."
To loosen up the tight mortgage loan market, the Federal Reserve said it would buy as much as $600 billion in debt and mortgage-backed securities of Fannie Mae and Freddie Mac, the government-sponsored lenders that were taken over by federal officials this fall, as well as Ginnie Mae and the Federal Home Loan Banks.
By buying Fannie and Freddie securities -- now viewed as risky by many investors -- the Fed hopes to drive down yields on that debt, which in turn should help lower mortgage rates.
"Nothing is more important to getting through this housing correction than the availability of affordable mortgage finance," Paulson said.
The government is not looking to buy toxic mortgage-backed securities issued by banks, the initial purpose of the $700-billion rescue fund that officials have since abandoned in favor of buying stakes in banks and other measures. But the new aid plan should help the housing industry by making it easier for Americans to get the loans they need to buy homes.
Government data released Tuesday highlighted the economic troubles. The Federal Deposit Insurance Corp. said the number of "problem banks" rose to 171 in the third quarter from 117 in the second quarter. And the Commerce Department said the economy shrank more than expected in the third quarter. It revised its estimate, saying gross domestic product contracted at an 0.5% annual pace rather than 0.3%.
"The problems facing the financial services industry, combined with the general economy, have dried up lending in all areas," said Scott Talbott, senior vice president for government affairs at the Financial Services Roundtable, which represents large banks, investment houses and insurers. "The Fed actions are a double-barreled shotgun: One barrel is pointed squarely at mortgages, one barrel is pointed at all other loans."
The small businesses that rely on loans to stay open desperately need to see more liquidity in the credit markets, said Scott Hauge, president of Small Business California.
"There have been situations where a guy went to have his credit line increased, but instead, they cut it in half," he said. "I've also heard about people who don't even know their lines or credit cards have been cut until they try to use it. It's a mess."
As a result, small businesses have had to make sharp cuts -- often slicing expenses, laying off employees and sometimes closing temporarily, Hauge said. They're hoping for a lifeline, but are wary.
"As for predicting when things will change, nobody knows," he said. "It's not clear to a lot of these business owners how Paulson's announcement today will translate into them getting money into their hands."
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- The amount to be used to buy mortgage-backed securities held by government-sponsored lenders Fannie Mae, Freddie Mac and Ginnie Mae, and debt held by Fannie Mae, Freddie Mac and the Federal Home Loan Banks.
- The amount to be used for loan guarantees to holders of AAA-rated asset-backed securities containing consumer loans such as credit card, auto and student loans. The Treasury Department will cover up to $20 billion in losses on those loans.