WASHINGTON, Nov 25: US authorities launched fresh efforts on Tuesday to unfreeze credit and limit the economic downturn with programmes to buy up to $800 billion in mortgage- and asset-backed securities.

The initiatives call for up to $600 billion in Federal Reserve purchases of mortgage securities, and a separate $200 billion for asset-backed securities to help get credit to consumers.

The new efforts come as part of a move to restart consumer credit markets that froze up in October and to get more liquidity and bring down borrowing costs for the housing market, which is at the centre of the economic storm.

The effort “attempts to restart the credit markets after the nuclear explosion that occurred in September,” said Andrew Busch, analyst at BMO Capital Markets.

“Clearly, the economy continues to reel from the extraction of low interest rates and available credit to financial institutions, to businesses, and to consumers.”

Economist Marie-Pierre Ripert at Natixis added, “Both these measures are clearly a significant step in the action implemented by the Fed in trying to avoid a deeper recession and to prevent the economy to fall in a deflationary spiral.”

The US central bank said it would launch purchases of up to $100 billion of obligations of housing-related government-sponsored enterprises including Fannie Mae and Freddie Mac in the next week, and buy another $500 billion in a process started by the end of this year.

Separately, the Fed said it would launch a programme to buy up to $200 billion in asset-backed securities -- backed by student loans, auto loans, credit card loans, and other loans -- in a further effort to unclog frozen credit markets.

The US Treasury said it was allocating $20 billion to the asset-backed securities fund as “credit protection.”

“The asset-backed securities market provides liquidity to financial institutions that provide small business loans and consumer lending such as auto loans, student loans, and credit cards,” Treasury said in a statement.

“Millions of Americans cannot find affordable financing for their basic credit needs,” Treasury Secretary Henry Paulson said, adding that the programme “may be expanded over time” to other types of assets.

The statement noted that these assets-backed securities amounted to $240 billion in 2007 but had dropped sharply in the third quarter of 2008 “before essentially coming to a halt in October,” making it harder for consumers to get credit and threatening a seizing up of economic activity.

According to the Fed statement, “Continued disruption of these markets could significantly limit the availability of credit to households and small businesses and thereby contribute to further weakening of US economic activity.”

The actions came as the government reported an economic contraction at a 0.5 per cent pace in the third quarter, sharper than the estimate last month of a 0.3 per cent decline.

Many analysts suggest this is just the start of a much more severe downturn with the housing market still under stress and credit frozen in many situations.

Last month, the Commerce Department in its first estimate had pegged the downturn in GDP at 0.3 per cent.

The latest revision was in line with forecasts by private economists and reflected downward adjustments to consumer spending, exports and government expenditures.

The report underscored an abrupt turn from growth of 2.8 per cent in the second quarter, although analysts said that figure was skewed by a surge in exports and consumer spending boosted by one-time tax rebates.

Many economists say the downturn in the fourth quarter could be even uglier, reflecting a credit crunch and ongoing woes in housing and manufacturing.

“Everyone is waiting for the hammer blow that weak auto sales is delivering to fourth-quarter growth,” said Robert Brusca at FAO Economics.

“A far faster pace of decline is certain in the fourth quarter, given the worsening credit conditions, sharp declines in household wealth and continued collapse in consumer spending,” said Peter Kretzmer, senior economist at Bank of America.—AFP