Consumer debt a new route for bailout
Share Now on:
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.
We’re here to help you navigate this changed world and economy.
Our mission at Marketplace is to raise the economic intelligence of the country. It’s a tough task, but it’s never been more important.
In the past year, we’ve seen record unemployment, stimulus bills, and reddit users influencing the stock market. Marketplace helps you understand it all, will fact-based, approachable, and unbiased reporting.
Generous support from listeners and readers is what powers our nonprofit news—and your donation today will help provide this essential service. For just $5/month, you can sustain independent journalism that keeps you and thousands of others informed.