The burden of pulling the US out its economic tailspin is being placed squarely on those responsible for it in the first place: Spend-happy consumers and a financial system too eager to lend.
The Federal Reserve announced today plans to lend up to $200 billion to financial institutions interested in buying new securities backed by credit cards, auto loans and student loans. The Treasury Department will pony up $20 billion of Troubled Asset Relief Program (TARP) money to help support the new initiative, the latest in the government’s attempt to help struggling American consumers tap the credit markets.
The facility will be managed by the New York Federal Reserve, which is chaired by Timothy Geithner, likely the next Treasury secretary.
Fed Chairman Bernanke and current Treasury Secretary Paulson hope the lending program will encourage new issuance of asset -backed securities, which, prior to the credit crunch, were the primary source of funding for consumer loans.
Banks and other issuers of credit cards and auto loans prefer to bundle these loans into packages, selling slices to investors with various risk preferences. This allows the banks to offload a portion of the default risk and make better use of their limited cash.
According to the Treasury Department, last year this type of financing accounted for $240 billion in new issuances, but is down precipitously this year as credit markets have seized up. As a result, banks like JP Morgan (JPM), Bank of America (BAC) and Citigroup (C) are being forced to keep more of the loans on their balance sheets. Since massive losses on bad debt have shrunken their capital bases, lenders are reticent to hand out new loans.
In a separate announcement, the Fed said it will also buy up to $100 billion in debt issued by Fannie Mae (FNM) and Freddie Mac (FRE) - and $500 billion in securities backed by the 2 government-sponsored enterprises, or GSEs. The action is aimed at reducing mortgage rates that have remained stubbornly high, even as the Fed has pumped billions into the mortgage market.
Despite massive intervention into the credit markets, myriad new lending facilities and hundreds of billions in new equity, banks are still being stingy. New loans are hard to get and expensive to boot.
As well they should be.
Americans are up to their eyeballs in debt. The government understands, however, that as long as credit cards stay maxed out, economic activity will continue to contract. Without savings to fall back on, purchasing decisions that aren't absolutely essential are being delayed indefinitely.
Giving consumers easier access to credit is a bit like handing a drug addict a pill, asking him to use responsibly and wandering off, leaving him to his own devices. The immediate problem may have been avoied, but the inevitabe crash is just that - inevitable.
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