TARP No Moreby Tim Manni
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.”
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.