Today's Papers

Time To Help the Average Joe

Everyone leads with the latest efforts by the federal government to thaw frozen credit markets, hints of which had already appeared in some of the papers yesterday, most notably the New York Times. The government announced it will pump up to $800 billion into credit markets to make it easier for Americans to get loans, with a particular focus on residential mortgages. Most of the money will come directly from the Federal Reserve and will make the central bank “a lender to almost every corner of American life,” points out the Wall Street Journal. The new massive commitment of taxpayer money is essentially divided into two programs. The Federal Reserve will purchase up to $600 billion of debt issued or backed by government-sponsored lenders, such as Fannie Mae and Freddie Mac, in an effort to make mortgages cheaper. Separately, the Fed and Treasury Department will create a $200 billion program to lend money against securities tied to car loans, student loans, credit card debt, and small-business loans. The program, which aims to make consumer loans more readily available, “comes close to being a government bank,” notes the NYT.

In addition to making loans more readily available, USA Todaypoints out that a “secondary effect of the programs” is that cash will be injected into the financial system, which could “help inflate the economy at a time when officials are increasingly worried about possible deflation.” The Los Angeles Timesnotes that by getting involved in consumer debt, the government is making it clear that it’s willing to “adopt strategies carrying greater risks.” In a sign of just how quickly the financial crisis has progressed, the Washington Postpoints out that the new program will commit the Fed to “spend nearly 100 times as much to buy mortgage-backed securities as the government envisioned in early September.”

The mortgage program announced yesterday is the easiest to understand since it’s pretty straightforward. The Fed will buy up to $100 billion of debt issued by government-sponsored lenders. In addition, the central bank will buy up to $500 billion of mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac, Ginnie Mae, and the Federal Home Loan Banks. The response from the mortgage market was almost immediate. The NYT points out interest rates on 30-year fixed-rate mortgages plunged “almost a full percentage point, to 5.5 percent, from 6.3 percent.” In a separate front-page piece, the WSJ points out that the announcement quickly led to a huge “burst of refinancing activity” across the country. The mere action of refinancing helps the economy because it gives consumers more cash to spend elsewhere, but economists also predict that in time these lower interest rates will also lead to at least a modest increase in home sales.

As encouraging as these signs were, it’s important to note that this new program will do little to prevent foreclosures since they’re mostly tied to high-risk mortgages that aren’t linked to government-sponsored lenders. As the WSJ points out,lower mortgage rates won’t help the estimated 11.8 million homeowners who aren’t able to refinance because they owe more than their homes are worth.

The consumer loans program announced yesterday involves up to $200 billion. It’s a rather complicated program, but essentially what could be characterized as the new government bank would lend money against securities backed by highly rated consumer and small-business loans. Part of the reason why it has been difficult for consumers to borrow money lately is because few investors have been willing to buy these securities. The program will be run by the Fed, but the Treasury will cover the first $20 billion in losses, which would come out of the $700 billion bailout package. As the LAT clearly explains this is potentially perilous territory for the government in part because credit card debt and student loans are often unsecured, “unlike home loans or auto purchases, which have tangible assets behind them,” which means there’s a higher risk they won’t be repaid.

Besides the danger that taxpayers could suffer huge losses, there are plenty of other risks in these new programs. “The long-term risks are enormous but difficult to estimate,” summarizes the NYT. The most obvious one is that it could cause inflation after the economy recovers. Some are also worried that once the Fed has made use of these unprecedented powers it could be hard to turn back. “Now that it has used those levers, don’t you think Congress will want it to start using them again? The Fed could become the go-to place for bailouts,” a former Fed official tells the NYT.

There’s also the clear risk that this program might not work or that more money could be needed in the future. Treasury Secretary Henry Paulson hinted as much yesterday saying that the new program was just a “starting point.” In the future it could be expanded to include other types of assets, such as commercial real estate. After hinting last week that the Treasury wouldn’t start any new programs until the next administration, Paulson made it clear yesterday that he won’t shy away from new initiatives in the coming weeks. “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.”

Despite all the potential risks, most agree that they pale in comparison to what could happen if the government failed to do anything. “They’re not messing around here,” an economist tells the Post. “This is a very aggressive effort. They’re not going to prevent a recession, it’s too late for that, but they’re trying to prevent a catastrophe.” Trying to prevent a catastrophe isn’t cheap. The NYT highlights that over the last year “the government has assumed about $7.8 trillion in direct and indirect financial obligations,” which is “equal to about half the size of the nation’s entire economy.”

In a sign of how much Americans are hurting during the economic downturn, the WP fronts word that the number of people on food stamps is set to pass the 30 million mark for the first time this month. “If the economic forecasts come true, we’re likely to see the most hunger that we’ve seen since the 1981 recession and maybe since the 1960s, when these programs were established,” the president of an anti-hunger policy organization tells the Post.

Moving on to transition news, the NYT, LAT, and WP front, and everyone mentions, word that President-elect Barack Obama will keep Defense Secretary Robert Gates in his current position. The news is hardly surprising as the possibility has been floating around for a while, but everyone notes the decision could disappoint some in the Democratic Party who want a clean break from the Bush era. The NYT notes it would mark the first time an incoming president has kept a defense secretary from a predecessor of a different party. Everyone notes it looks like Gates will stay on for about a year, though the WP does have sources who say he could stay indefinitely. The WP says most of the deputies under Gates would be replaced, while the LAT highlights that issue hasn’t been resolved yet. “The real issue is: Who does Gates keep, and does Obama have a say in what team is there?” one official tells the LAT. But no one actually thinks that would derail his appointment.

Obama is expected to make the Gates appointment official early next week, when he will also name other members of his national-security team. Everyone says it seems almost certain that Obama will name Gen. James Jones, a retired Marine commandant and onetime NATO supreme commander, as his national-security adviser.

The NYT points out Democrats are no longer using the word stimulus. And it’s no accident. Democratic leaders and members of Obama’s team are pushing members of their party to use the words economic recovery program when they’re talking about the stimulus package they want to push through Congress early next year. The public apparently responds to it better, and Democrats want to emphasize that turning the economy around is going to take time.

In an op-ed piece in the WP, Karl Meyer and Shareen Blair Brysac write that New York Gov. David Paterson should send former President Bill Clinton to the Senate. If, as expected, Sen. Hillary Clinton becomes secretary of state, Paterson would be faced with “the agonizing dilemma” of choosing someone from around 20 candidates. But by picking the former president, Paterson would not only appoint someone who could be a great asset to New York in a time of crisis, he would also “offer a refreshing reverse twist on a tradition whereby deceased male senators, representatives or governors are succeeded by their widows.”