New Loan Programs are Short-Sighted Stimulus

The spending continues in Washington, and while concerns about moral hazard or quasi-nationalism have all but been thrown aside, a more troubling reality is emerging: not only has the country not stopped to ask “how this happened” and settle on a firm answer, but in the process of scrambling to save a ship we think is sinking, we’re repeating the same errors that got us here in the first place. It is difficult to get your mind completely around the numbers being thrown around. We’ve had a monetary perspective inflation over the past months, as “just another 100 billion or trillion dollars” doesn’t seem large anymore. It can safely be estimated that we’ve spent or loaned at least $4 trillion dollars over the past several months–either by direct loan, bailout buy ups, or through the Fed’s discount window–according to these numbers posted on OCO earlier this month and this story from Dividend Daily. To put $4 trillion in perspective, you could lay dollar bills end to end from New York City to Los Angeles and they would stack nearly 50 feet high all the way across by the time you laid out $4 trillion. Just recently, according to Bloomberg, Secretary Paulson has injected $270 billion in to the banks as a recapitalization project. Citigroup got an extra $20 billion share to help them through their stock slump (and the moral to the story there is just have your investors pull out so the government will give you more cash). Oh, and AIG got yet another $40 billion. But news from Secretary Paulson today about increasing consumer credit protection is the real worry. In the midst of all the financial shenanigans in the past decade was a nasty trend in reduced underwriting standards. This is the trend that allowed a couple earning $8 per hour at McDonalds to get at $600,000 loan. Low interest rates in the early 00s encouraged lending, but it was the underwriting standards that let so many uncollateralized loans infect the market. The lesson we should learn from this is to not give money to people just because they want to buy a house and that helps the market, but only give money to people who have the capacity to pay it back. And yet, reports today say the Fed, by means of the new Term Asset-Back Securities Loan Facility, will “lend as much as $200 billion on a non-recourse basis to holders of AAA-rated asset-backed securities backed by ‘newly and recently originated’ loans, such as for education, credit cards, automobiles and loans guaranteed by the Small Business Administration.” Additionally, the Treasury will commit $20 billion of the TARP money to support consumer and small-business loans. There is a fear that credit firms–such as American Express, Visa, or smaller creditors–might not have enough capital to get through the holiday spending period. Creditors have extended large lines of credit that haven’t yet been used, and a rush at that money might force the firms to put up more cash against those loans then they have on hand. As a result, consumer credit has dried up as firms try to limit the credit they’ve placed on the line. The Fed and Treasury are essentially saying: hey, keep giving out money so people can spend, we’ve got your back if you run out. The push for spending has the holiday in mind, as well as an attempt to restore consumer confidence. The Black Friday to Boxing Day period is a major sales time that companies depend on for fiscal solvency. Not only does the government want to increase current spending levels, but it wants to make sure a dip in spending during the holiday season doesn’t take a lot of companies with it. While that fear is understandable, increasing the public ability to get credit without ensuring that underwriting standards and rating agency problems are corrected will just lead us back to this place again down the road. This is classic short-term, static thinking that amounts to a stimulus by another name.