Paulson Determined to Keep Credit Flowing

The government's new agency to buy up illiquid mortgage debt will need to be "sufficiently large" to have the "maximum impact" on frozen credit and lending markets.

That's the latest from Treasury Secretary Henry Paulson, who said more details will come next week.

"We're talking hundreds of billions of dollars," he said.

In the meantime, it looks like the government-controlled Fannie Mae and Freddie Mac have a job do to.

From Paulson's statement:

First, to provide critical additional funding to our mortgage markets, the GSEs Fannie Mae and Freddie Mac will increase their purchases of mortgage-backed securities (MBS). These two enterprises must carry out their mission to support the mortgage market.

Second, to increase the availability of capital for new home loans, Treasury will expand the MBS purchase program we announced earlier this month. This will complement the capital provided by the GSEs and will help facilitate mortgage availability and affordability.

The continued expansion of lending (not just stopping short sellers, or saving money market funds, although those should help) is the lynchpin of any plan to return markets to normal.

Pauslon's plan has to pass Congress before members leave Washington at the end of next week, so it's going to be another anxious weekend for Wall Street.

In the meantime, stocks are soaring. The Dow's 340 point rally by mid-morning Friday follows a 400-point surge in the last hours of Thursday trading.

Any talk of the government shying away from bailing out the financial sector, a position articulated just a week ago ahead of the Lehman Bros. collapse, has now been swept away.

It seems to be working.