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November 12th, 2008

TARP No More

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The Treasury Department has announced their plans to shift the makeup of the $700 billion financial-rescue plan. At a press conference today, Treasury Secretary Henry Paulson explained that the Treasury will disband its efforts to buy up bad assets:

Mr. Paulson said the $700 billion would not be used to buy up troubled mortgage-related securities, as the rescue effort was originally conceived, but would instead be used in a broader campaign to bolster the financial markets and, in turn, make loans more accessible for creditworthy borrowers seeking car loans, student loans and other kinds of borrowing.

“During times like these with a slowing economy and some deterioration in credit conditions, even the healthiest banks tend to become more risk-averse and restrain lending, and regulators’ actions have reinforced this lending restraint in the past,” Mr. Paulson said at a news conference.

But, he added pointedly, with their financial foundations already shored up by recent government support, “our banks will be more confident and better positioned to play their necessary role to support economic responsibility.”

What is the structure of the new plan designed to do?:

According to economists, the Treasury would simply go out and buy some of these consumer-debt securities whenever the price fell far enough to push the yield up to a certain level, say 9 percent.

Like Treasury bonds, these debt securities have a fixed interest rate, so their yield changes according to whatever price investors are willing to pay for them.

If investors knew that the government would enter the market whenever the yield on these securities hit 9%, the theory goes, that would encourage them to buy up the debt as well.

That would push the price of the securities up and send the yield lower. The market for such securities would unfreeze and make it easier for consumers to get a loan for college or a new car. Credit card rates also would decline.

Skeptics of the $700 billion plan are no doubt saying “I told you so.” In the defense of the Treasury, they tried something they thought would work, it hasn’t, and now they’re taking a different approach. The government has urged banks with the “sharp-elbow” approach to start lending. The ball is in their court.

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2 Responses to “TARP No More”

  1. Dave Says: November 24th, 2008 at 8:45 am

    Here is my call on why the TARP(Terrorism And Racketeering Payments) is continually shape shifting. Paulson is lost. Wall Street and financial firms leveraged close to a trillion dollars at about 33:1. A few hundred billion or a few thousand billion in bailout money is not even a scratch at the tens of trillions that American capitalism has scammed? What fire is put out first?

  2. Tim Manni Says: November 24th, 2008 at 1:40 pm

    Dave,

    Thanks for reading and leaving us a comment. You have been just one of many frustrated taxpayers who have expressed their extreme displeasure in the path our capitalistic system has taken. Why problem should we tackle first? — there seems like so many. Since when did “billions” lose its meaning? Once upon a time billions meant something…now we’re talking trillions! It feels like we’re in way too deep.

    What will the new administration be able to do to solve the problem?

    Thanks again for commenting,
    Tim

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HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni

Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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