The government is coming to help.
The Federal Reserve and Treasury Department on Tuesday unveiled a plan to pump $800 billion into the struggling U.S. economy in an attempt to jumpstart lending by banks to consumers and small businesses.
The government hopes that these initiatives will enable more money to flow to consumers in the form of loans than has occurred so far in previous bailout plans.
One program will make $200 billion available from the Federal Reserve Bank of New York to holders of securities backed by consumer debt, such as credit cards, car loans and student loans.
Where is all this money coming from?
The programs from the Federal Reserve and the New York Fed are more than Congress approved in October for a bailout of the nation’s banks and Wall Street firms. The Fed said the money will come from an increase in its reserves — in essence, it is creating new money.
The idea is that by making money available for investors who are interested in buying loans bundled together into securities, it will be easier and more profitable for banks to loan money to consumers and small businesses.
Before the current credit crisis, lenders got the money they needed to extend credit by selling the loans they had already made. But the Treasury Department said the issuance of those securities essentially came to a halt in October.
Read my front page post and my post on demand–I do not think this is the action that will be needed they are just making easy credit easier to obtain. Wait! Is that not what put us in this spot today? Does anyone else see the stupidity in this?
The Obama administration wants banks to use some TARP money to increase consumer and business loans. Or so they say. There’s talk of stricter controls and oversight for TARP II. But exactly how the Obama administration will force banks to start lending more money to consumers and businesses isn’t clear. Does the Obama administration really want to do it?
Banks know that with the economy stumbling and more and more businesses going under and people losing their jobs, defaults on mortgages and unpaid auto loans and credit cards increase. Delinquencies rise for all types of consumer credit. With fewer people buying, business lending gets riskier. In such an environment, banks loan less, not more. They hoard cash for an even rainier day.
A better idea is to help consumers pay the debt they already have through mortgage restructuring or mitigation and economic stimulus through job creation. If you lose your job, the best way to keep paying your mortgage, car note and credit card bills is to get another job. At the same time, government can twist lending institutions and investors to renegotiate consumer debt, like threatening them with cram-downs, which already seems to have worked. Use TARP to help banks stay solvent, while economic stimulus creates jobs so people can pay their bills, then debt restructuring makes those bills easier to pay. That will loosen up credit – slowly, but in a sustainable way. Anyway, do we really want to increase consumer and business debt right now?
In return for bailing out banks, let’s get the biggest equity stake possible. I’m not afraid of the N-word: nationalization. We don’t nationalize like Venezuela does; whatever chunk of the banks that taxpayers buy will be sold back to private investors later on. The key to whether Obama’s bailout of banks is a success is whether the federal government recoups its losses, or turns a profit, a few years from now. If it does, it will all be worth it.
http://tinyurl.com/ObamaTARP
Morning Jim…….thanx for the visit and the comment…..I agree with you totally and I have a page entitled “demand not liquidity”. There are many who are calling for the nationalization of the banks at this time. On that point I have a mixed opinion I can see the need but at the same time I can see where it may not be the best course of action because government is not the best steward of money.