Fed Risks `Spitting in the Wind' With $800 Billion Pledge to Thaw Lending

[Purveyor]

By Craig Torres and Scott Lanman

Nov. 26 (Bloomberg) -- The Federal Reserve's new $800 billion effort to combat the financial crisis is designed to make credit more accessible to shaken consumers who aren't sure they want more debt.

Households and lenders may not respond much because of the wealth destruction from plunging property and stock values, and the deepening economic slump, economists say. That means banks may end up returning the Fed's new liquidity through deposits at the central bank.

``We are sort of spitting in the wind,'' said Michael Darda, chief economist at MKM Partners LP in Greenwich, Connecticut. ``Banks won't be throwing a lot of loans out there when they fear -- rationally -- those loans may not be paid back.''

Policy makers aim to kick-start markets for loans to students, car buyers, credit-card borrowers and small businesses with a new $200 billion program. Backed in part by the Treasury, the Fed will become a new buyer in the market for consumer loans at a time when many traditional holders of the assets, such as off-balance sheet bank units, have collapsed or been dissolved.

The announcement of the new efforts yesterday came amid rising criticism that officials were excessively focused on saving Wall Street firms, with the Citigroup Inc. rescue Nov. 23 the latest example. President-elect Barack Obama said repeatedly in the past two days he'll compose a plan to help ``Main Street'' as well as the financial industry.

1966 Powers

Obama and congressional Democrats have also pushed for a stronger response to the housing crisis. The Fed responded yesterday, invoking authority first granted in 1966 to buy $500 billion of mortgage-backed securities issued by Fannie Mae, Freddie Mac and Ginnie Mae.

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BLOOMBERG: http://www.bloomberg.com/apps/news?pid=20601103&sid=abP7tXlIB..4&refer=us

[Triana]

1. They are indeed pissing 800B into the wind with that plan. They MUST

GET PEOPLE BACK TO WORK before people are going to want or need LOANS. We don't LOAN MONEY to unemployed people. Helloooo?

[BR_Parkway]

2. I can't recall seeing anyone actually say that - even thought it's

common sense to most of us.

A whole lot of this "frozen credit" stuff is driven by the fact that many, many of us don't want to go into debt right now

[pscot]

3. This is the "Hair of the Dog" method

of recharging the economy. Americans have been on a 10 year credit binge, and Paulson sees more credit as the remedy. Nothing like a pint of bourbon to take care of that hangover. The bankers fuck up, so we socialize their losses. But the profits? Oh, that's free enterprise. We wouldn't want to do anything to dampen the entrepreneurial spirit, now, would we. :puke: