Feds unveil huge plan to jump-start economy

November 25, 2008 6:21:57 PM PST
The government Tuesday announced a massive new plan to jump-start the economy and encourage people to get mortgages, buy new cars and start shopping again.

The government will buy $600 billion in mortgage-backed securities in the hopes of freeing up money for making home loans.

Another $200 billion will go to banks and credit card companies for making loans to consumers and small businesses.

The number of people in a position to borrow all of that money is largely unknown.

However, as the holiday shopping season gets underway the great fear is that consumers will cut back sharply and drive the economy into a deeper hole.

Buying a car or any big-ticket item has been tough.

Banks tightened credit for fear consumers were overwhelmed by falling home prices and hefty mortgage payments. The stranglehold on consumers has put pressure on retailers, causing the economy to sink.

"I think they should be spending. You have to keep between the rails, though. If you spend too much eventually it's going to catch up. And they say, if you're going to dance, you have to pay the fiddler," said Danville resident john Klassen.

The government's plan is supposed to loosen credit, but some consumers say they're already in too much debt to spend again.

"We've got a pretty high credit card balance right now that we're dealing with. We've got to take care of ourselves first I guess," said Albany resident Laurie Amaro.

Others like David Marzola of Dublin think the time is right to spend again.

He says, "There are some good prices out there now on all of retail along with cars. So if credit becomes available I think people will start buying again."

When asked if he was included Marzola replied, "Maybe not a car. But maybe some big-ticket items, yes."

This is a flip-flop on the part of Treasury Secretary Paulson. At first he planned to buy toxic loans. Then he decided against it. Now he has changed his mind again.

Stanford Professor of Finance Jonathan Berk at the Graduate School of Business says this erodes confidence.

"The overall sense is that people do not have a lot of confidence that the administration really knows what they're doing. And, every time they change their minds on things it adds to a lack of confidence," Said Berk.

Secretary Paulson defended changing his mind, "It is naive for any of us to think that when you are dealing with a situation of this magnitude that a bill could be passed or a single action taken to make all the issues go away."

Some analysts thing it would take as long three months for the impact to trickle down to consumers. However, Tuesday's news did have a big impact on mortgage rates.

ABC7's financial partner Bloomberg reports that the rate for a 30-year fixed mortgage fell three-quarters of a percent to 5.5 percent.


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