Remember how, post 9/11, President Bush urged patriotic Americans to go to the mall? It appears the officialdom is fond of time-tested remedies.
Bloomberg tells us that the Fed and Treasury have a plan,, using TARP funds, to get consumers to spend again by supporting consumer lending. There are a few problems with this approach:
1. The banks have already been given support right, left and center. They are still not lending,
2. Some of the stinginess is warranted. Um, a credit bubble means a lot of people got loans who shouldn’t have. Do we want banks again to make unsound loans? I should hope not, but I could be wrong here. A fair bit of consumer credit ought to contract. And even if a lot of good customers also have their credit lines cut, do you really think the banks are going to turn around and reverse these decisions on a meaningful scale. Ain’t happening.
3. Consumers are scared about employment and the loss of their home equity piggybank. They also know they borrowed too much. They want to lower debt levels. So as a reader put it, “Even if you throw the horse in the lake, you can’t make him drink.”
4. Banks are so desperate to restore profits that they are jacking up prices on existing consumer credit, even as the Fed and Treasury have been provided lots of low-cost support. Citibank and American Express are raising interest rates on existing loan balances for a a significant proportion of customers, and they no doubt have company. If consumers face higher charges on their outstanding debt. it considerably reduces the odds that they can or will take on more debt.
And a separate issue: consumer debt and consumer spending were at unsustainable levels. They need to fall. Trying to shore up consumers is a wrongheaded way to stimulate the economy. Fiscal expenditures, including a broadening of safety nets, is a much better way to go.
Persisting in a failed course of action is not a sign of intelligence.
The U.S. Treasury and Federal Reserve will unveil as soon as today a lending program to shore up the consumer-finance market, using money from the government’s $700 billion rescue, two people familiar with the effort said.
The Treasury and the Fed will help fund new loans packaged into securities for sale to investors, the people said. Treasury Secretary Henry Paulson, who scheduled a press conference for 10 a.m. New York time, said two weeks ago that he wants to spur lending for automobile purchases and college education while also reducing the cost of credit-card debt…
Senator Charles Schumer, a New York Democrat, urged the Treasury and Fed yesterday to use the $700 billion fund to make it easier for automakers’ finance units to lend….
Paulson previewed the new program in a Nov. 12 speech, when he said the Treasury and Fed were “exploring the development of a potential liquidity facility for highly rated AAA asset-backed securities.” The government could use some of the bailout fund to encourage private investors to re-enter the market, he said.
“Addressing the needs of the securitization sector will help get lending going again, helping consumers and supporting the U.S. economy,” Paulson said..