Posted by
Mr. D. on Tuesday, November 25, 2008 9:30:10 AM
By now, everyone should know the sad story of Fannie Mae and Freddie Mac. The Government Sponsored Entities or GSEs. For those who need a refresher:
Fannie Mae and Freddie Mac were created by the Federal Government to make a secondary market in mortgages. Mortgage lenders routinely sold the mortgages they made to the GSEs. The GSEs used these mortgages to create Mortgage Backed Securities (MBS). Mortgage lenders recovered the money they lent which enabled them to make more mortgages available to home buyers, investors got shares in a seemingly safe investment at a satisfactory return and the GSEs made a profit on the transactions. This was a good thing as long as mortgages were made under sound credit standards. Some 90% of mortgages were sold to the GSEs.
Then politics caused a change in mortgage underwriting credit standards and the rest, as they say, is “history” or to use the more popular phrase to describe the result, “Financial Melt-Down”.
Today, the government announced a plan to do for the consumer credit industry what it has done for the mortgage industry. As the article quoted below explains, the Federal Government proposes to create a secondary market for debt on credit cards, auto loans, student loans and…well, who knows what else.
Under the plan, credit card companies, for example, will be able to sell the debt of their credit card customers and a security will be issued and sold to investors. Maybe these securities will be called “Consumer Debt Securities” or CDSs someday? The plan will allow lenders and credit card issuers to recover the money they advanced in order to make new loans. The investors will get…well, you know the drill by now. This may be a “good” thing as it seems the plan would increase the “velocity” of money (an economic term used to describe how quickly money circulates in an economy) and increase the supply of money during a deflationary period.
But, what happens if the credit standards on consumer debt are too low? Do you still find unsolicited credit cards in your mailbox? Or, what happens if politics intervenes to lower credit standards? After all, isn’t it “socially responsible” for credit card companies to issue cards to the poor who deserve “access to credit” in order to achieve “economic justice” in a society where wealth is so highly and unfairly concentrated in the hands of the wealthy?
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http://online.wsj.com/article/SB122758048504155625.html?mod=mktw
• NOVEMBER 25, 2008
New Facility Targets Consumer Lending
Treasury Secretary Henry Paulson, seeking to ease strains in the consumer credit market, plans to announce Tuesday the formation of a program to increase the availability of auto loans, student loans and credit cards, according to people familiar with the matter.
The lending facility, which will be operated by the Federal Reserve, is expected to provide loans to investors who want to buy securities backed by credit cards, auto loans and student loans, these people said. Treasury will contribute between $25 billion to $100 billion to the facility from its $700 billion Troubled Asset Relief Program.
The program is aimed at making it easier for consumers to borrow money. Government officials, including Mr. Paulson, have grown concerned about "distress" in the consumer finance market, as the availability of household loans has ground to halt amid a broader credit crunch.
While the initial focus will be on consumer loans, the facility could eventually be expanded to cover all manner of assets, including mortgages.