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New $800 Billion Bailout Initiative Aimed At Main Street Gives Investors New Hope

26 November 2008 - Features - Editor

While many U.S. stock market players may have faced Tuesday with trepidation, thinking it unlikely that markets would experience gains for a third day in a row, the announcement by the Treasury Department and the Federal Reserve that $800 billion will be injected into the struggling U.S. economy resulted in the session ending with most major indexes reflecting slight increases. The Dow Jones industrial average closed 0.4 percent up and the Standard & Poor’s 500 index climbed 0.7 percent, however, the Nasdaq Composite dropped 0.5 percent. The Dow may have gained 12.3 percent over the past three sessions, but remains down 36.1 percent for 2008.

The new $800 billion bailout package is primarily aimed at stimulating the steadily declining credit markets, as well as the economy. This will ultimately benefit consumers in that they will be able to get credit and loans, with mortgage loans being cheaper and more readily available. The lack of affordable consumer credit, resulting in decreased consumer spending, has had a weakening effect on the economy, which the new bailout package aims to reverse. The Federal Reserve Bank of New York will be making $200 billion available to holders of securities which are backed by consumer debt, including car loans, student loans and credit cards. In turn, the Treasury Department will earmark $20 billion to back the New York Fed’s loan in the event of any losses it may experience. Additionally, the Federal Reserve is set to buy up to $500 billion in mortgage backed securities and $100 billion in direct debt relating to the three U.S. government sponsored mortgage finance firms, Freddie Mac, Fannie Mae and Ginnie Mae. The Fed disclosed that this huge amount of money will come from an increase in its reserves, in other words, it will be creating new money.

With the $200 billion consumer lending package set to be put in place in February 2009, retailers are no doubt hopeful that the mere announcement that this package is in the pipeline will motivate lenders to make more credit available to consumers for festive season shopping. Treasury secretary Henry Paulson described the consumer lending package as the first step in a process which will go on to include different types of debt, such as business debt and assets backed by non-government real estate mortgagers. He also emphasized that the need for the new $800 billion bailout package does not mean that the $700 billion bailout for Wall Street firms and banks failed, as without it the financial situation of the country would have been in a far worse state than it is.

Analysts see this new initiative as a shift of focus from assisting Wall Street to assisting Main Street, where assistance is desperately needed. However, in light of the fact that previous efforts of pouring money directly into financial institutions did not have the desired effect of freeing up credit, many stock market investors are taking a “wait and see” attitude as to whether the new bailout will achieve its objectives.

 


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