November 27, 2008
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News: How Much Will $800 billion Help CC Industry?
With Henry Paulson's recent additional $800 billion bailout announcement, we are certainly not short on contenders for this prize. We are told that $200 billion of this is to be divided between credit card loans, car loans and student loans. $600 billion is slated for mortgaged-backed securities. The credit card side of things is considered to be riskier for it's being unsecured (the government may not get any of it back). But the need is obvious to create healthy economic flow in order to recover. This means that consumers must continue to buy. The key word here ‘healthy', implies a balance between what our consumers have on hand now and what they can pay back beyond that. So the credit card industry is being promoted, but with greater regulation than before.
Finance professor at the University of Arkansas and a former Federal Reserve economist, Timothy Yeager advises: "They have to reach further and further out on that risk scale in order to have any effect because what they've done so far . . . hasn't solved all the problems." Again, because credit card debts are unsecured (meaning there are no physical assets to back them up), they are more risky than say, home-owners' or auto loans. When credit card debt goes into default, there are fewer options for recovery.
Sen. Charles E. Schumer (D-N.Y.) explains it this way: "The arteries of the financial system are still clogged, and as a result, too much of the economic activity on Main Street is slowing to a crawl." He says that we must take this risk to loosen credit in order to move forward. The biggest shopping season of the year is upon us right now and, without credit cards, both consumers and retailers alike are bound from having any financial elbow-room.
Meanwhile, the credit card companies, themselves, are in a squeeze. They're trying out new measures for their own survival, like raising interest rates and reducing spending limits. These are not being received well by the public. So the government is having to step in as a referee to protect both sides and develop a healthy balance that is both, ‘safe' and functional.