A new twist in the bailout strategy has been decided since Treasury Secretary Henry Paulson announced that the government is no longer going to focus on purchasing troubled mortgage assets. Originally, troubled mortgages were slated to receive a substantial portion of the financial rescue strategy. The newly freed-up resources are now going to focus specifically on the consumer credit industry.
The $700 billion emergency rescue plan was first developed as a way of keeping the markets liquid by providing emergency funds to prevent the credit market from further shutting down. The money was going to be aimed at financial institutions through buying up toxic assets with the hope that this additional capital would provide them with the sense of security needed to start the business of lending again. Unfortunately, that hasn’t quite caught on with the speed that is needed. Around 50 financial institutions have been granted approval (or have been pre-approved) to receive $172 billion in capital resources.
To help speed things up, the US Treasury’s $700 billion rescue plan is tilting the tables toward consumer’s debt. Paulson positioned the need to officially broaden the initial scope of the project to help aid those non-banking institutions that deal directly with consumer credit issues. Credit card companies, student loan providers and auto loans can soon be the beneficiaries of the second stage of this unprecedented Government assistance plan, as investors are no longer partial to these types of loans.
Paulson stated that, “although the financial system has stabilized, both banks and non-banks may well need more capital given their troubled asset holdings, projections for continued high rates of foreclosures and stagnant U.S. and world economic conditions.”
His thoughts are that systems dealing with consumer loans need assistance as “Approximately 40 percent of U.S. consumer credit is provided through securitization of credit card receivables, auto loans and student loans and similar products. This market, which is vital for lending and growth, has for all practical purposes ground to a halt.”
The hope of this entire strategy is by stabilizing the big lenders, the financial system will no longer be clogged. Ultimately, the country and all its residents will benefit from a trickle-down effect and the reactivation of credit liquidity.
