November 27, 2008
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News: How Will Gov't Interact with Bailout?
This new rescue plan for the credit card industry will be orchestrated by the Federal Reserve. It will be set up to provide loan guarantees to investors to create highly rated consumer securities that are now asset-backed. Treasury Secretary Paulson stresses that this will all take some time but that, the program should continue to grow over time, once it gets underway. To power this initiative, the Treasury Department will provide the engine by allocation $20 billion from the original $700-billion bailout fund. This will act as a safeguard for loses and add security for investors. The reason this is necessary is because, as of October, the securitization market has lost confidence and has shied away from any further investments. These investments are essential to the credit card industry. So the government is stepping in to reduce risk that is scaring off investors. It is hoped that this will provide the impetus to loosen credit constraints in this $2.6-trillion credit card market and get our economy going again. So, the purpose is to provide investor confidence in new loans that will be offered to them and offloaded from the lending banks.
It turns out that many parts of our economy are intertwined, meaning that different disparate areas become entangled with each other. A major collapse of one industry can trip other mechanisms that the other industries depend on also. So it is with the housing industry, the securitization market and the credit card industry. Senior vice president for government affairs at the Financial Services Roundtable, Scott Talbott, sums it up when he says: "The Fed actions are a double-barreled shotgun: One barrel is pointed squarely at mortgages, one barrel is pointed at all other loans." A very critical area of those ‘other loans' is the credit card industry.
Now is a time when our nation needs to shore up employment. The last thing we need to do is drive our bedrock small business industry into ruin with a frozen credit card industry. Already, many small businesses are having to make sharp cuts and lay off employees. Some are even having to close temporarily. Consumer confidence is still at an all-time low – this is an economy killer. With these initiatives, confidence seems to be reviving slowly. With a more-responsive government and new president, it finally looks like we're getting the change we need.