Federal Reserve Starts Printing Money to Jumpstart Lending

The Federal Reserve and US Treasury have announced another bailout, this one theoretically for consumers and small businesses. This plan involves another $800 billion.

The $800 billion will be split into three programs: $200 billion from the Federal Reserve Bank of New York to the holders of credit card, car loan, and student loan backed consumer debt, $500 billion to purchase mortgage backed securities backed by Fannie Mae, Freddie Mac, and Ginnie Mae, and another $100 billion to buy direct debt issued by those firms.

Although the sum vastly exceeds the amount legislated and approved by Congress in October, the Federal Reserve stated that the funds would come from an increase in their reserves--printing money.

The buying of consumer credit backed securities has essentially ceased. The premise behind this plan is to get securities investors back in the market with these funds. Leading to lenders, who traditionally made money by originating and packaging these loans into securities, offering credit to consumers again.

The concern is that previous attempts to inject capital directly into financial institutions to induce lending has failed consistently.

An interesting political side-note to this new announcement is the role of the Federal Reserve Bank of New York. President of the New York Fed, Timothy Geithner is the Treasury Secretary-select for President-elect Brack Obama. A certain indicator that President-elect Obama is already subtly taking the reigns of US economic strategy.

What will be the effect on mortgages and mortgage rates? That is still a bit uncertain, but out of the gate it has induced a massive historic mortgage rate plunge. The 30-year fixed-rate mortgage has descended into the high 4 percent range, from 6 percent. This is the largest single day mortgage rate drop since 1988.