IMPEACH BUSH

Nov. 25 (Bloomberg) -- The Federal Reserve took two new steps to unfreeze credit for homebuyers, consumers and small businesses, committing up to $800 billion.

The central bank will purchase as much as $600 billion in debt issued or backed by government-chartered housing-finance companies. It will also set up a $200 billion program to support consumer and small-business loans, the Fed said in statements today in Washington.

With today's announcement, the central bank is starting to use some of the unorthodox policy tools that Chairman Ben S. Bernanke outlined as a Fed governor six years ago. Policy makers are aiming to prevent a financial collapse and stamp out the threat of deflation.

"They're trying to put funds into the system, trying to unfreeze these markets," said William Poole, the former St. Louis Fed president, in an interview with Bloomberg Television. "Clearly, the Fed and the Treasury are beginning to take a large amount of credit risk."

The Fed will purchase up to $100 billion in direct debt of Fannie Mae, Freddie Mac and the Federal Home Loan Banks and up to $500 billion of mortgage-backed securities backed by Fannie, Freddie and Ginnie Mae, the statement said.

Aid for Housing

"This action is being taken to reduce the cost and increase the availability of credit for the purchase of houses, which in turn should support housing markets and foster improved conditions in financial markets more generally," the Fed said.

Separately, under the new Term Asset-Backed Securities Loan Facility, the Fed will lend up to $200 billion on a non-recourse basis to holders of AAA rated asset-backed securities backed by "newly and recently originated" loans, such as for education, automobiles, credit cards and loans guaranteed by the Small Business Administration, the Fed said.

The Treasury will provide $20 billion of "credit protection" to the Fed in the lending program, using funds from the $700 billion financial-rescue package. The Treasury said in a statement that the facility may expand over time and cover other assets, such as commercial and private residential mortgage- backed debt.

On the ABS facility, the Fed is trying to avoid having "continued disruption of these markets" that would limit lending and "thereby contribute to further weakening of U.S. economic activity," the central bank said.

ABS Program

Under the new lending program, known as the TALF, the New York Fed will auction a fixed amount of loans each month for a one-year term. Assets will be held in a special-purpose vehicle to be created by the Fed. The program will stop making new loans on Dec. 31, 2009, unless the Fed Board of Governors extends it.

Lenders providing credit under the TALF "must have agreed to comply with, or already be subject to," executive- compensation restrictions in the October bailout law, the statement said.

The Fed will start buying the direct debt of government- sponsored enterprises -- Fannie, Freddie and a dozen federal home loan banks -- through primary dealers in government debt from next week. The purchases of mortgage-backed securities will be done through asset managers, and officials aim to begin the effort by year-end.

Purchases of both types of debt "are expected to take place over several quarters," the Fed said.

To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net.
Last Updated: November 25, 2008 08:45 EST WASHINGTON, Nov 25 (Reuters) - The U.S. economy shrank more severely during the third quarter than first estimated as consumers cut spending at the steepest rate in 28 years, according to a Commerce Department report on Tuesday that underlined how rapidly activity was slowing.

Corporate profits fell for a second straight quarter and business investment fell, the department said as it revised the annual rate of decline in third-quarter gross domestic product to 0.5 percent from the 0.3 percent that it reported a month ago. It was the sharpest fall in GDP since the third quarter of 2001 when the terror attacks against the United States took place.

Many analysts believe the United States already has joined Europe in recession, though it will take another quarter of contraction to meet a widely used definition for it -- back-to-back quarters of declining output. The third-quarter decline was a striking contrast with the second quarter's relatively brisk 2.8 percent rate of growth.

"I think it anchors the beginning of the U.S. technical recession," said Michael Woolfolk, senior currency strategist with Bank of New York-Mellon in New York. "It's likely to get worse before it gets better."

The U.S. decline is widely predicted to accelerate in the fourth quarter and last into 2009.

Prices for U.S. Treasury debt securities rose after the GDP report was issued as investors apparently sought safety, while the dollar was weaker.

Continuing job losses, a severe credit crunch, falling home prices and a wobbling stock market have put consumers under severe stress. Consumer spending that fuels two-thirds of U.S. economic activity fell at a 3.7 percent rate in the third quarter rather than 3.1 percent as previously estimated -- the sharpest rate of decline since the second quarter of 1980.

Spending on durable goods like new cars and home appliances that are intended to last three years or more plummeted at a 15.2 percent rate instead of 14.1 percent as previously estimated, the steepest fall since the start of 1987.

The revised GDP report offered a first look at corporate profits during the third quarter and, not surprisingly, they were down. Profits dropped at a 0.4 percent rate after falling 5.4 percent in the second quarter, the department said.

Business investment fell at a revised 1.5 percent rate in the third quarter rather than 1 percent as previously estimated. It was the first reduction in business investment since the end of 2006 and signals that companies are wary about prospects for future sales.

Prices rose during the third quarter, with a gauge based on personal expenditures rising 2.6 percent, excluding volatile food and energy costs, down from the 2.9 percent increase estimated a month ago but ahead of the second quarter's 2.2 percent rise.

But with the economy contracting, prices are expected to come under pressure, and deflation has emerged as a bigger concern than inflation. (Additional reporting by Wanfeng Zhou in New York, Editing by Andrea Ricci)