Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke have added a few more floors to their ever-expanding bailout house of cards. Their two agencies kicked in another $800 billion in the latest frantic effort to ward off financial collapse. The Fed is putting up $600 billion to buy mortgage-backed securities and mortgages held by Fannie Mae and Freddie Mac. This seems, at least initially, to have brought down mortgage rates—assuming anyone is in a position these days to buy a house.
The plan for the other $200 billion is more dubious. Treasury and the Fed are going to use those funds to make loans to consumer finance companies, which in turn would be in a position to provide more auto loans, student loans and credit cards. Yet, as with the bailout of the banks, there seems to be no actual requirement that the finance companies use their new liquidity to open the spigots to consumers. We are apparently supposed to take it on faith that these lenders will in fact lend, even though it’s now clear that many of the banks used their federal assistance for other purposes.
Another questionable assumption in the plan is that consumers are aching to borrow more money. With unemployment soaring and the value of retirement savings dwindling, most people are opting for austerity, not seeking to add to their already heavy debt load. Creating more jobs and boosting household income are more urgent than allowing people to go further into hock.
And finally, it is worth recalling that many of the consumer finance companies have been as predatory in their lending as the unscrupulous subprime mortgage lenders. Nowhere is this truer than in the credit card business. These are the companies that, thanks to deregulation in their industry, have been gouging consumers with usurious interest rates and punishing fees.
The idea that bailing out these firms is the way to help consumers is yet another indication of the warped thinking of Paulson and Bernanke. It does not occur to them that the solution might be to lessen the hold that the card companies have on consumers—through measures such as interest rate reductions—rather than intensifying it. But what can you expect from what has become a government of the financial institutions, by the financial institutions and for the financial institutions.