As I predicted, the banks took their capital injections and sat on it. Their capitalization numbers look better. They are much less in danger of insolvency. Bully for them, but they're still not lending. At a time when interest rates are dropping, a good credit score gets you a rejection or an average rate, an average score gets you a rejection or a high rate, and a below average score gets you shown to the door. This cannot stand, or our economy will fail.
So, as I previously proposed, I believe the remaining bailout money needs to be loaned directly to the people. The Small Business Administration should be lending out billions for the expansion and creation of small businesses, which are the true drivers of our economy. On that note, I am in favor of the job creation credit, but only for small businesses. I believe that some jobs are on the margins and are not created because of the added expense, but that the credit will result in many of those jobs being created.
But that still won't help the credit market as much. The commercial paper market is hugely important and it completely froze after that money market fund broke the buck. Have FINRA and the SEC set hard and defined limits for what money market funds can invest in, and then provide a 100% guarantee that they will not break the buck, akin to FDIC protection. The hard and defined rules will prevent the possibility of breaking the buck, which was already pretty minuscule to begin with. One caveat: fund companies have had to subsidize money market funds to prevent breaking the buck for years. It's a common practice, and this practice must continue before protection kicks in. With all this in place, money market fund managers will begin buying up commercial paper in a hurry.
Finally, I advocate the creation of a GSE for commercial paper and consumer credit. Fannie and Freddie worked. They were great when the government owned them, and they made home ownership a possibility for four generations of Americans, to the benefit of the entire country. It's the privatization underregulation that didn't work.
But I want them involved in the direct extension of credit, rather than buying up privately issued loans. We had a basic level of available credit before the crisis hit. I propose that we adopt an inflation adjusted minimum equal to 80% of that level. However much available credit has dropped, the government lends to that level. I also want a mandate that the government undercut existing loan rates. 29% on credit cards is just plain usury. Even if it's just 12%, that would create downward pressure on rates. Additionally, no one can buy cars if they can't get a car loan.
This model works well for education (or did until tuition rates went insane), and there's no concern about default. I've yet to meet someone who got out of their student loans through any means but repayment. The government will make some money, and the bonds sold to fund these loans would be at extremely low interest rates.
All of this is in effect a large scale, partial nationalization of the credit markets. But as an old school liberal who believes that government does what the people can't do for themselves, I think it's time. Wall Street won't save itself and will take us down with it. We have to have an alternative.