(03-08) 04:00 PST Washington — The Federal Reserve is taking bigger steps to ease the nation’s credit crisis, including increasing the amount of loans it plans to make available to banks this month to $100 billion.

The Fed said Friday that it will boost the size of auctions planned for March 10 and March 24 to $50 billion each, up from the $30 billion limits it had announced previously. The auctions serve as short-term loans to get banks the cash they need to keep lending to their customers.

The Fed said it plans to continue the auctions for at least six months and will move to larger auction amounts if needed.

In a second step, the Fed said it will make $100 billion available through weekly 28-day repurchase agreements, where the central bank will lend cash in return for assets such as mortgage-backed bonds.

The Fed has been working to pump billions of dollars into the banking system to aid an economy rocked by the subprime mortgage crisis and the severe tightening of credit. The central bank started its new type of auction in December to provide short-term loans to cash-strapped banks in hopes of keeping them lending. So far, the Fed has made available $160 billion in short-term loans to banks through six auctions.

A meltdown in the housing and credit markets has made banks and other financial institutions reluctant to lend to each other, causing a cash crunch. Financial companies racked up multibillion-dollar losses as investments in mortgage-backed securities soured with the housing market’s bust. Problems first started in the market for subprime mortgages- those made to people with blemished credit histories. However, troubles have spread to other areas.

Sharper Image Corp., which filed for bankruptcy protection last month, is seeking court permission to close 96 stores nationwide - including nine in Northern California - as part of its plan to reorganize and liquidate assets.

In documents filed this week, the San Francisco retailer known for its high-tech and high-end gadgetry wants to shutter stores in San Francisco’s Union Square, Burlingame, Milpitas, Los Gatos, Santa Rosa, Roseville (Placer County), Sacramento, Fresno and Carmel.

The 184-store chain, which filed Feb. 19 for Chapter 11 protection in U.S. Bankruptcy Court in Delaware, must first obtain bids from liquidators and receive approval from the court before initiating the closures. The company filed the list of stores it wants to close on March 4.

Bay Area locations spared include Spear Street in San Francisco, San Mateo, Palo Alto, Corte Madera, Pleasanton and Santa Clara, according to stores listed on the company’s Web site.

In related news, Sharper Image said Friday it will honor the full value of its gift cards, but only if consumers buy items that cost twice the value of the certificates.

The announcement marks a change from the company’s earlier decision to stop accepting gift cards, at least temporarily, as is typical when a company files for bankruptcy reorganization under Chapter 11.

Under the plan, Sharper Image said it would immediately honor gift cards as long as they are redeemed in one purchase that costs double the value. For example, a $25 gift card will be redeemed in full as long as the customer purchases $50 in merchandise.

Customers who don’t like that policy are urged to hang on to their cards because the company promised it is working to be able to honor the cards’ full value.

“We have worked very hard to address the concerns of our customers and to dispel rumors in the media that our cards are worthless. That is simply not true,” Robert Conway, Sharper Image’s chief executive officer, said.

Conway said that while the new policy is “not a complete solution,” it does provide some satisfaction to customers.

By Friday afternoon, the new gift-card policy had not been updated on the company’s Web site, and some store employees had not yet been informed. A Sharper Image spokesman confirmed the policy had just been approved by the court and the company was in the process of updating its stores and its Web site.

In its heyday, Sharper Image became well known for its sales of high-end air purifiers. Negative reviews of the company’s Ionic Breeze air purifier, followed by a failed libel challenge, reportedly contributed to the company’s fall.

Sharper Image’s competitors are taking advantage of their rival’s misfortune.

PurePro LL, a direct competitor of the Ionic Breeze, will redeem Sharper Image gift cards of any denomination for $50 toward the purchase of the Los Angeles online retailer’s air purifier. One card will be honored per order.

“Even if you have a $25 gift card at Sharper Image, we’ll give you $50,” said PurePro spokesman Todd Geller, adding that the offer is set to expire March 31 but the company plans to extend it.

Brookstone Inc., a Sharper Image competitor, will offer Sharper Image gift-card holders 25 percent off any purchase, regardless of the card’s value.

Guy Amuial, a 31-year-old mortgage broker from Virginia Beach, Va., went to a Sharper Image store last Saturday and tried to use a $50 gift card from Christmas to buy a massage chair. After being told the store could not honor the card, he went to a nearby Brookstone store where he saw the 25 percent deal. The savings: nearly $2,000.

“Not only did a buy myself a chair, but I bought my brother one as well,” he said. “I turned $50 into two grand.”

What’s in store

– Sharper Image is seeking court permission to close 96 of its 1,884 stores, including those in San Francisco’s Union Square, Burlingame, Milpitas, Los Gatos, Santa Rosa, Roseville (Placer County), Sacramento, Fresno and Carmel.

– Sharper Image Inc. has resumed honoring gift cards.

– For more information, go to «www.sharperimage.com».

– Court documents pertaining to the company’s bankruptcy filings are available at links.sfgate.com/ZCRG.

Source: Sharper Image.

E-mail Victoria Colliver at vcolliver@sfchronicle.com.

Treasury Secretary Henry Paulson came to the Bay Area Thursday and Friday amid a slew of bad news on the housing and economy fronts, including a report that 63,000 jobs disappeared nationwide in February.

Paulson is the Bush administration’s top economic policy official and has taken the lead on the government’s program encouraging lenders to offer relief to subprime borrowers.

On Friday, he sat down with The Chronicle before an appearance at Stanford University to talk about the risks facing the economy. The interview has been edited for space and clarity.

Q: The credit crunch seems to be getting worse. Are we falling into a vicious circle in which falling home prices are choking off lending, causing prices to fall further?

A: The risks are clearly to the downside here. We are very focused with what’s going on with financial market turmoil. When the turmoil began in August, I said it would take a while to work through the excesses because they had been building up for some time in the housing markets and the credit markets. We are making progress. There are going to be bumps along the road. There are going to be unpleasant surprises from time to time along the way.

I’ve watched capital markets over my careers and I’ve seen sentiment swing extremely from time to time. In July, financial institutions were aggressively looking for risk. They were too comfortable with it perhaps. Now sentiment has swung back hard to risk adversity. But the institutions are adapting. They are raising capital. I have great confidence in our markets.

My big focus here is to aggressively encourage any big financial institution that may need capital or think they many need capital to go out and raise it because it’s available today.

Because if they don’t have enough capital, then they shrink their balance sheet and they restrain lending, which is vital to keeping our economy healthy and growing

Q: Many Americans are dismayed by how far the dollar has fallen. Should we be worried?

A: As Treasury secretary, I’ve always been very clear that a strong dollar is very much in our nation’s interest. We have a strong dollar policy. Our economy, like any other, has its ups and downs. It’s structurally sound.

The long-term fundamentals are healthy. The risks are to the downside right now, but the long-term fundamentals are healthy. And I have confidence that the long-term fundamentals will be reflected in our currency markets.

Q: Do you think the administration’s initiatives are sufficient to deal with the housing crisis or do you think there’s some merit in Federal Reserve Chairman Ben Bernanke’s position that lenders should be encouraged to recognize principal losses?

A: I don’t believe Chairman Bernanke and I have a different position. We both believe that our policies should reach out to homeowners that want to stay in their home and are able to afford to do so and to reach out to them through the industry to make modifications, do refinancings, is a very good program. We know foreclosures are expensive and they hurt homeowners and communities and the economy.

Clearly, writing down principal on a loan is one of the tools that financial institutions have. They can address the problem by writing down principal on the loan, they can address the problem by reducing interest rates. They can do it through other forms of modification of the loans when they make sense. That’s the program we are supporting very aggressively. We have this industry alliance to get out to all homeowners that may have a problem, but particularly those who have subprime adjustable-rate mortgages.

Q: What about people who are underwater?

A: There’s been a lot of discussion about homeowners who have zero or negative equity. The way I’ve looked at that is, if you are a homeowner and you can afford to make your mortgage payment, you should be honoring that mortgage payment. If you say, “I don’t want to honor that payment, and I’m going to leave unless someone else takes my losses,” I don’t think the government should be taking those losses any more than the government should be bailing out any investor who has a loss. In many instances, people who are walking away are speculators who put little or no money down.

Q: What do you say to the growing number of our readers who tell us they can’t make ends meet? To what extent do our public officials bear responsibility for the situation?

A: First of all I want to say that I empathize with your readers. There are many people working hard and struggling to make ends meet. There’s no doubt that high energy prices today are a headwind. That food prices are an issue. That we have the housing correction. That our economy is slowing down. That’s why a huge part of my focus and the president’s focus is to do things that will make a difference.

Growth in this country was almost 5 percent in the third quarter. But when we saw the economy slowing down, we moved very, very quickly to work with Congress on the economic stimulus package. I’m going to be working very diligently with the Internal Revenue Service to get those payments out to your readers beginning May 2.

When we’ve had excesses like we’ve seen in a number of markets and unsustainable home price increases, a correction is unfortunately inevitable and it’s necessary.

E-mail Sam Zuckerman at szuckerman@sfchronicle.com.