New $800 bn rescue for US economy

Mining company BHP Billiton’s $66 billion bid for rival Rio Tinto became the latest corporate casualty of global economic turmoil, with BHP blaming the financial crisis and sliding metals prices.

The Fed’s move is intended to strike at the heart of US economic woes, the collapsed housing market. The resulting meltdown in the high-risk mortgage market engulfed the world and caused the worst financial crisis in 80 years, freezing access to credit, sparking bank collapses and requiring the bailout of entire countries.

The latest actions mean the US government now faces a possible bill as high as $8.3 trillion from various programs to prop up the financial system, revive loan markets and rescue faltering companies. That is more than half last year’s US gross domestic product, about $14 trillion.

President-elect Barack Obama announced his top budget officials on Tuesday and promised significant spending cuts to partially offset the costly stimulus package.

Under its latest massive life-support intervention for the US financial system, the Fed is planning a $600 billion program to buy mortgage-related debt and securities and a $200 billion facility to support consumer debt securities.

“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 financial conditions more generally,” the Fed said in a statement.

At the same time, Goldman Sachs sold a greater-than-expected $5 billion of bonds guaranteed by the US Federal Deposit Insurance Corp, a promising start for a government program approved last Friday that is aimed at loosening jammed credit markets.

‘HEART OF THE PROBLEM’

Investors generally welcomed the Fed’s latest move, although some worried that injecting more dollars into the financial system would spur inflation.

“They (the Fed) are getting to the heart of the problem,” said Todd Abraham, co-head of government and mortgage bonds at Federated Investors in Pittsburgh.

“It’s clean, it’s quick, it’s direct. It’s a good way to bring down mortgage rates, because at the end of the day they have to stabilize the housing market,” he said.

The Fed’s move had an immediate effect on mortgage rates, showing some relief in consumer markets. The 30-year mortgage rate plunged about 0.75 per centage point to 5.5 per cent, according to Bankrate, Inc.

US large cap stocks ended higher after European and Asian stocks gained. Oil fell sharply to below $51 a barrel while the US dollar slumped against the euro and the Japanese yen.

Stocks of home builders and consumer lenders jumped, boosted by the Fed’s support plan.

Global data and sentiment surveys confirmed the depth and breadth of the problems. The US 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.

It revised the annual rate of decline in third-quarter gross domestic product to 0.5 per cent from 0.3 per cent, the sharpest fall in GDP since the third quarter of 2001 when the Sept. 11 attacks against the United States took place.

“I think it anchors the beginning of the US 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.”

Prices of US single-family homes also plunged a record 17.4 per cent in September from a year earlier, according to a key index released on Tuesday.

Although China, the world’s biggest consumer of many metals, this month unveiled a 4 trillion yuan ($586 billion) spending package to prop up its economy, growth would still likely slow to around 7.5 per cent in 2009, the World Bank said, which would be China’s slowest growth rate since 1990.

Official data confirmed Germany is in recession for the first time in five years.

And falling consumer and business morale in Italy and France pointed to a continent heading for a prolonged recession, with a surprise tick up in consumer sentiment in Germany seen as an isolated and temporary blip.

The European Commission will propose on Wednesday measures to stimulate the recession-hit European economy including VAT cuts and a call for lower European Central Bank rates.