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Consumer debt a new route for bailout
U.S. Treasury Secretary Henry Paulson gives an update on the financial rescue package during a news conference in Washington, D.C. -- November 12, 2008
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TEXT OF INTERVIEW
Scott Jagow: Congress was told its rescue package would be used to buy up bad mortgage-related debt. But as you know, yesterday, Treasury Secretary Hank Paulson said that won't work. It's too complicated and will take too long. Now, Paulson wants to spend $50 billion on the consumer debt market.
We're joined by our correspondent, Steve Henn, in Washington. Steve, exactly what are we talking about here?
Steve Henn: So banks aren't the only institutions that lend to consumers -- credit card companies, auto financing arms of the big auto makers, but also like Car Max -- they all lend to consumers. And when they made those loans, they would then bundle them up and resell them to investors. Just like mortgages were bundled up and resold to investors as bonds. And the market for those bonds, based on consumer debt, has just simply frozen.
Jagow: So the $50 billion from the rescue package that's being set aside for this, where is it going?
Henn: Well, reports are the Treasury will give it to the Federal Reserve, and the Federal Reserve will use that money to begin to attract private investors. And then they'll set up sort of a pool of cash to invest in these bundles of car loans and credit card loans, and people will buy that as investment. So the Fed will be an investor, and it will also offer guarantees to private companies hoping to lure private investors back into this consumer debt market.
Jagow: And how is this supposed to benefit consumer spending overall?
Henn: Well, consumer spending is obviously a huge part of the American economy. And as we've seen over the last few months, as people have seen their 401K's, you know, shrink dramatically and they've watched the equity in their homes disappear, consumer spending has really slowed down. Part of that has to do with all the losses I was just talking about. Part of it also has to do with the fact that if you have a credit score below 700, it's tough to get a car loan these days. If they could unlock the credit markets for consumer debt a little bit, more people might be able to make purchases they'd like to make.
Jagow: All right, Steve Henn in Washington, thank you.
Henn: Thank you.
I was waiting for the bailout of credit card companies. As a child of depression era parents my goal was a paid off house, vehicles and all debt - paying cash for major purchases was also a priority.
I was appalled to see the creation of easy unsecured credit become a vehicle for excess. It seems the chickens have come home to roust.
Though I feel empathy for them - over zealous credit users, I have little sympathy for those who took on excess debt. This injection of money into the credit industry seems like throwing gasoline unto a fire.
Paulson’s plan to bail out credit card companies is foolish. This is like using federal bail out money to underwrite more sub-prime mortgages. For years credit card companies have been extending credit to poor credit risks. They constantly fill people’s mail boxes with offers the receivers neither need nor, if they made full use of them, can afford. They extend credit to people who do not have the ability to pay, then compensate for their reckless lending policies with a contractual minefield designed to extract usury fees from unwary customers. Their business model is to over charge those who can to pay to make up for those who can’t pay. This may work in a good economy but it has some distinct disadvantages when the economy and peoples ability to pay weakens. Since our regulatory agencies took a hands off approach and allowed them to select this model, free market economics dictates that those companies should succeed or fail based on their decision. They should not receive a taxpayer bailout. If federal officials want to bail them out to stimulate the moribund economy, they should re-instate and enforce the usary laws we once had before doing so. The American economic patient needs surgery not another shot of morphine
where is the help for as the people who needs it the most, low income familes that buy house 140.000 and now is worht30.000. in a 9% interest where are all the billians that where appoved to help the housing market, o you mean the bankers and pribate investors that are billionairs.
Scott,
Your interview with Steve Henn on the Morning Report today (Nov. 13, 2008) about $50B the Fed wants to spend on consumer debt really got me thinking. And then I got scared. It used to be that people would invest in the federal government by buying bonds. Now the federal government wants to invest in "the people" by buying consumer debt. Doesn't this seem insane? Won't such a circle of debt simply snow-ball in the long run? Help me understand this.
Jason
