U.S. Government Looks to Stimulate Consumer Lending

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The Washington Post reported that the Federal Reserve and Treasury Department are “creating a $200 billion program that will lend against highly rated securities backed by auto loans, student loans, credit card lending and small-business loans backed by the Small Business Administration.”

This is part of a larger $800 billion plan to help homeowners. The Federal Reserve will also be purchasing up to $500 billion in mortgage backed securities. It was also be buying up to $100 billion in direct debt from Fannie Mae, Freddie Mac, and Ginnie Mae.

The goal of the Federal Reserve is to reduce the cost of lending to help stimulate demand for mortgages, credit cards, and other consumer loans. Increased borrowing should lead to more consumer spending which, in theory, will help the dragging U.S. economy.

This may spell good news for people looking to obtain debt consolidation loans. Banks and credit card companies have been reluctant to lend money and have been increasing the interest rates they have been making available to consumers. Proponents of the new plan expect that it will result in greater availability of credit for consumers at improved terms. Consumers may be able to improve their cash-flow and reduce their interest expense through debt consolidation.

Critics of the plan are not confident that the Federal Reserve’s investment will flow through directly to the consumer as planned. Although banks and lenders will have access to more capital through this plan, it is unclear if they will make that money available to consumers. There is also a fair amount of confusion over whether lenders will lower their underwriting requirements to include a larger segment of borrowers.

Critics also believe that even if more credit becomes available to consumers, many will choose not to borrow due to low consumer confidence. Escalating unemployment with the promise of future lay offs has many consumers reducing consumption and decreasing their reliance on credit.

“I wish, and I know everybody wishes, that one piece of legislation, and then magically the credit markets would unfreeze,” said Treasury Secretary Henry Paulson. “That’s not the type of situation we’re dealing with.”

The plan does little to help those homeowners who currently owe more on their homes than they are worth and are facing foreclosure. Banks and mortgage lenders will still be unwilling to lend money to those whose collateral is worth less than the amount they want to borrow.

Critics and proponents of the plan do agree that it is the first with the intended goal of making credit more available and less expensive for the U.S. consumer. Previous bailouts have been aimed at helping shore up the large banks and lending institutions and have done little to help the average American.

About the Author:
Chris Rocks is the Regional Director of the National Credit Federation (NCF), a consumer advocacy group that assists small business owners and consumers overcome debt and credit challenges. He can be contacted by visiting his personal site, GoodCreditLiving.com.

Post written by Chris Rocks