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Feds Shift Gears On Bailout, Puts Focus On Consumers

Treasury switches from buying toxic securities to helping credit markets

By Mark Huffman
ConsumerAffairs.com

November 12, 2008

Living in a Bubble? Mortgage Crisis? Act Now to Avoid Foreclosure • Avoiding Foreclosure Takes More Than Hope --- • Consumers Fall Further Behind in Payments • House Democrats Seek Bankruptcy Rule Changes • Pending Home Sales Post Record Drop • Home Prices Plunge in October • Navigating the Mortgage Modification Maze • Mortgage Rates Reach 37-Year Low • Boomers Facing Tough Social Security Choices • Is It Safe to Buy a House? • Mortgage Modification Meltdown • Mortgage Defaults Still Rising • Mortgage Rates Take Another Sudden Drop • Fed Slashes Rates to Near Zero • Consumer Prices Plunge in November • Home Values May Fall More in 2009 • Americans' Net Worth Plunges Nearly $3 Trillion • Surge in Mortgage Applications Doesn't Last • Pending Home Sales Slide in October • Get Your Mortgage Rate Lock Ready • Modifying Mortgages Isn't Slowing Default Rate • Mortgage Delinquencies, Foreclosures Surge • Mortgage Applications Surged 112 Percent Last Week • GAO Calls for Better Bailout Oversight • Homes Lose More Value In Third Quarter • Home Prices Post Record Decline • Fed Throws $800 Billion Lifeline to Consumers • Existing Home Sales Drop in October • When in Doubt, Leave Nothing Out • Fannie Mae and Freddie Mac Suspend Foreclosures • Consumer Prices Plunge in October • Paulson Rejects Bailout Money for Detroit • Another Glimmer of Hope in The Housing Market • Buyers' Beware Market • FDIC Backs More Aggressive Loan Modification Plan • Housing 2009 Forecasts Mixed, But Mostly Grim • Foreclosures Up Five Percent in October • Feds Shift Gears On Bailout, Puts Focus On Consumers • More Homeowners Under Water in Third Quarter • Feds Mount New Effort to Help Struggling Homeowners • Lenders Embrace Workouts for Struggling Homeowners • Obama Can't Quickly Raise Homebuyers' Hopes • At Last: Bailout Trickling Down to Struggling Homeowners • New Home Sales Rise in September • How to Appeal Your Property Tax Bill • Existing Home Sales Rise in September • Administration Considers More Help for Homeowners • Foreclosure Activity Drops in September • Southern California Home Sales Surge 65 Percent in September • HOEPA: New Hope for Outlawing Abusive Mortgages • FDIC Chief: Not Enough Help for Homeowners --- • More ...

Treasury Secretary Henry Paulson says the federal government won't be buying those "toxic" mortgage-backed securities after all. In a speech in Washington Wednesday, Paulson said the government will pump the remainder of the $700 billion rescue package into the consumer credit market.

When Paulson and Federal Reserve Board Chairman Ben Bernanke appeared before Congress in September, they pleaded for the money, saying they planned to begin buying up those securities that no one else wanted. That way, they said, the government could pump more money into the credit system and banks would start lending again.

Now, however, the plan has changed. Paulson said the Treasury Department has scrapped the idea in a tacit admission that it wasn't going to work. Instead, he says, the government should use the remaining $350 billion to prime the consumer credit market.

"Illiquidity in this sector is raising the cost and reducing the availability of car loans, student loans and credit cards," Paulson said.

So instead of buying up mortgage securities, Paulson says the money will be used to support companies that make consumer loans. The reason? Retailers are in panic mode.

Earlier this week Circuit City filed for bankruptcy protection and Best Buy, in drastically slashing its earnings outlook, said it has never experienced anything like the current environment.

So that's where the money is headed.

"Approximately 40 percent of U.S. consumer credit is provided through securitization of credit-card receivables, auto loans and student loans, and similar products," Paulson said. "This market, which is vital for lending and growth, has for all practical purposes ground to a halt."

The problem, it appears, is not just the banks, but has spread to the consumer economy. With unemployment suddenly surging, consumers are spending less and retailers are feeling the pain.

"Retailers and auto manufacturers are being struck with the reality that the consumer spending boom which sustained them may not come back for years, if at all," said Michael Mandel, Chief Economist for BusinessWeek.

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