Treasury Secretary Henry Paulson's latest plan for the $700 billion bailout fund has many economists responding like Seinfeld's Soup Nazi, "Next!" They say the idea of using funds approved by Congress in early October to stimulate credit card and auto lending is ill advised and unnecessary.
"I don't think providing more leverage to consumers is best for our economy in the long-term," says Adam Lerrick, who is a visiting scholar the conservative-leaning Washington-based think tank American Enterprise Institute. "The consensus is that consumers have borrowed too much over the past 10 years, so I don't get why putting them further into debt is the answer." (See pictures of the global financial crisis.)
What's more, industry watchers say credit card and auto lending has actually held up quite well despite the credit crunch. According to market research firm Synovate, the average consumer probably has a higher limit and therefore can spend more on their credit card than they could a year ago.
"Our data shows that people have still have more access to credit than ever before," says Andrew Davidson, a VP at Synovate. "Some companies are pulling back credit to riskier borrowers, but for the industry as a whole, access and usage of credit cards is at record levels."
Last Wednesday Paulson pulled what some have called the TARP-and-switch. The Treasury Secretary said he was backing away from using a large portion of the $700 billion Troubled Asset Relief Program fund to buy up troubled mortgage bonds. Instead, Paulson said he was more interested in helping the currently stalled market for financing among other things credit card and auto loans.
The Treasury Department says nothing has been finalized, but reportedly Paulson and his advisers are looking into using TARP funds along with some money from outside investors to buy up credit card, auto loans and other, non-mortgage consumers debt. The financing mechanism for that type of debt, often called securitization, has stalled like much of the rest of the banking sector. Paulson is hoping that buying up debts directly will be a better way of stimulating lending than just purchasing banks' shares and trying to force the firms to extend loans.
But some economists wonder why buying up credit card and auto loan debt is any better or easier to do than buying up mortgage bonds. In fact, when it comes to credit card debt it could be riskier way to use taxpayer money. That's because credit card debt unlike mortgages is unsecured. If a borrower defaults, there is no house to repossess. What's more, credit card debt, unlike a mortgage, can be wiped away in bankruptcy. (Read "Four Steps to Ending the Foreclosure Crisis".)
"This is riskier for taxpayers," says Andrew Jakabovics, an associate director at the Center for American Progress. Worse, it's not clear the program would do anything to boost the economy. Yes, consumer spending is dropping, but some economists think that is a function of confidence, not credit. "Paulson seems to be working under the impression that when it comes to consumer spending liquidity is the issue," says Dean Baker, who co-founded the Center for Economic Policy Research. "People aren't buying because they just lost a lot of money and might be about to lose their job." Lastly, it is not even clear the program is needed. Yes, banks and other lenders do appear to be stuck with loans they don't want, some of which will go bad, but so far it doesn't seem like they are pulling back credit from consumers. According to Synovate, the average household had a combined credit limit on all the plastic in their wallet of $27,626, up from $26,902 a year ago. Auto loans are down, but not in a big way, and not nearly as much as you would expect in a bad economy.
"I don't get what the rationale for this new program is," says Baker. "If it was a bad idea for the mortgage market, then it's a bad idea in the credit card market."