With the announcment yesterday that the TARP program would not buy bad assets (a good decision) and would instead invest capital in financial institutions, also came an announcment that the bailout funds now would be used to help unfreeze consumer lending markets.
But with a little more than two months left before President Bush leaves office, Treasury Secretary Henry M. Paulson Jr. is hoping to put in place a major new lending program that would be run by the Federal Reserve and aimed at unlocking the frozen consumer credit market.
The program, still in the planning stages, would for the first time use bailout funds specifically to help consumers instead of banks, savings and loans and Wall Street firms.
Treasury officials said they hoped to invest about $50 billion from the bailout fund into the new loan facility, with the aim of helping companies that issue credit cards, make student loans and finance car purchases.
NY Times
More, after the fold.
Many Democrats applauded Paulson's move to inject capital rather than buy debt:
"I’m glad to see that Secretary Paulson has finally seen the light," Chuck Schumer, a Democratic senator and chairman of the joint economic committee, told reporters. "To me, as most of you know, it was clear from the beginning that capital injections were the way to go."
snip
Barney Frank, the Democratic chairman of the House financial services committee, briefly brought up the Treasury’s shift at a hearing on the housing crisis, suggesting that the asset-purchase programme would have given the government additional leverage to modify mortgage loans on a big scale.
"I believe that we still have a need for the [remaining $350bn] to be used to put the federal government in the position of being the owner so we can do the kind of sensible write-down of mortgage payments to avoid foreclosure that’s in the interest of the economy as a whole," Mr Frank said.
Financial Times
As we enter the first 21st Century Global Depression, unemployment is up, foreclosures show no signs of ceasing, and traditional US companies like GM, Ford, and Chrysler are tottering. Circuit City is the first of the big retail bankruptcies to come. The Bush program of destruction of the global economy may have a bright side, though. With the biggest class stratification since the 1920s, the destruction of the economy may have an egalitarian aspect as fortunes are lost. Peersonally, I prefer uplift of the poor to downward mobility of the upper, upper middle class, and middle class into poverty, but maybe the nouveau poor will learn that we truly all are in it together. As middle managers take food stamps for the first time, maybe they'll understand how evil Reagan's mocking of the poor was, and how wrong their own mocking was. I'm joking, I think. As we spread poverty, many families will suffer deeply. It's hard, hard time, and unless we all work together, those times will be harder.
Barack Obama, Nancy Pelosi and Harry Reid support a bailout of the US auto industry. I agree. There are too many jobs to allow it to fail. We need to take equity stakes and force greener vehicles.
Now Paulson is looking to shore up consumer credit, because consumer purchasing, the motor of the economy, has crashed.
These are really hard times and will take major, major efforts just to ameliorate the pain.
Back to Mr. Paulson:
The same morning, America’s four federal bank regulators issued an unusual warning to banks: lend more or else. The regulators are usually preoccupied with keeping banks sound and warning them not to lend too loosely. No more. They issued an "interagency statement" saying it was "imperative" that banking organisations and regulators make sure that borrowers’ needs are met. Bank supervisors have been told to encourage banks to do so.
The guidance carried a veiled threat: supervisors "will take action" if they find a bank is paying dividends that they deem too high for either a bank’s capital or its ability to meet borrowers’ needs. Banks could rightly protest that as long as they are healthy, their dividends are not the regulators’ business, but bank regulation is now simply another weapon in the government’s arsenal against the credit crunch.
The Economist
Lend or else. It's about time.
People focus on the stock market, but the TARP plan, however implemented, was about LIBOR (unfreezing bank lending), and it has had an effect:
With barely two months before Barack Obama becomes president, the actions of Mr Paulson and the Fed show some sign of easing the financial crisis. Libor, the rate charged on dollar loans between banks, has fallen sharply. But the financial crisis has spawned an economic crisis and an entirely new set of demands. The car companies are not "first-round" victims of the credit crunch the way Lehman Brothers and AIG were. They are second-round victims: the credit crunch has left millions of potential customers unable to finance car purchases, crushing sales for an already weakened industry. General Motors is now at risk of running out of cash within months.
The Economist
In my view, the stock market has been overvalued since 1997. This is a correction to reality. Bubble economies eventually pop. Thank you Alan Greenspan and George Bush. Not.
At the risk of attacks by those who are so certain about their view of the world, I like this statement:
"I will never apologise for changing an approach or strategy when the facts change," Mr Paulson said.
US drops plan to buy toxic assets
Whatever, I'm glad he changed it. Ideological consistency in the face of negative data is what got us into this mess. Faith over empiricism. The Laffer curve. Supply side bullshit.
And Obama is acting as much as he can prior to taking office:
Meanwhile, the Barack Obama transition team said he would send Madeleine Albright, a former Democratic secretary of state, and Jim Leach, a former Republican congressman, to represent him at the G20 summit of world leaders this weekend.
US drops plan to buy toxic assets
This pain will be here for a while:
Rich countries are sliding into recession and output will contract next year, the Organisation for Economic Cooperation and Development predicted on Thursday becoming the latest international organisation to acknowledge the global downturn has spread from the financial sector to the real economy.
FT: OECD says little chance of recovery next year
Barack Obama will shift focus directly to bailing out poor folks, which is what the old middle class is going to be, if it's not already.
The next few years will be very tough.
Immediately after I become president, I'm going to confront this economic crisis head on by taking all necessary steps to ease the credit crisis, help hardworking families, and restore growth and prosperity.
snip
First of all, we need a rescue plan for the middle class that invests in immediate efforts to create jobs and provide relief to families that are watching their paychecks shrink and their life savings disappear.
A particularly urgent priority is a further extension of unemployment insurance benefits for workers who cannot find work in the increasingly weak economy.
A fiscal stimulus plan that will jump-start economic growth is long overdue. I've talked about it throughout this -- the last few months of the campaign. We should get it done.
Second, we have to address the spreading impact of the financial crisis on the other sectors of our economy: small businesses that are struggling to meet their payrolls and finance their holiday inventories; and state and municipal governments facing devastating budget cuts and tax increases.
snip
Third, we will review the implementation of this administration's financial program to ensure that the government's efforts are achieving their central goal of stabilizing financial markets while protecting taxpayers, helping homeowners, and not unduly rewarding the management of financial firms that are receiving government assistance.
snip
Finally, as we monitor and address these immediate economic challenges, we will be moving forward in laying out a set of policies that will grow our middle class and strengthen our economy in the long term. We cannot afford to wait on moving forward on the key priorities that I identified during the campaign, including clean energy, health care, education, and tax relief for middle-class families.
President-Elect Obama's Press Conference
The last is key:
We cannot afford to wait on moving forward on the key priorities that I identified during the campaign, including clean energy, health care, education, and tax relief for middle-class families.
There are short term and long term solutions. We must do both.
Video of the press conference last week:
Things are going to get much worse before they get better. Now, more than ever, we must try to put in to practice what Obama repeatedly has said:
That's the promise of America - the idea that we are responsible for ourselves, but that we also rise or fall as one nation; the fundamental belief that I am my brother's keeper; I am my sister's keeper.
Barack Obama at 2008 DNC, quoted in The Counter Narrative of Barack Obama: "The Promise of America"