Some time ago, I explained why I think the credit markets are hosed up; one of my readers was even kind enough to say he thought it was well written and well thought out. In short, I think the banks aren't lending to each other because none of them knows what overblown totals in credit default swaps the others may be sitting on, so they're afraid to lend to anyone. If this sounds as though I think the banking system is insolvent, I'm afraid that's what I think these days.
So now Mr. Paulson has conjured another huge sum of money out of his top hat, only a quarter of which will come from the money Congress actually authorized. He's going to throw this money at the consumer lending industry, so people will be able to borrow again; he's doing this by promising to buy up securitized packages of car loans, consumer debt, credit card debt, etc.
I'm still not sure where he thinks he got the authority to print all this money. Congress didn't authorize it. Does the Federal Reserve really have the authority to print up $800 billion just because the Treasury Secretary says so? I know they can increase the money supply to fight inflation but this seems out of line.
In my previous post, I didn't go into why people aren't spending money because, frankly, I thought it was obvious: the economy is in the tank, job losses are hitting levels not seen in nearly 30 years, mortgages are still resetting higher, everybody's 401K investments have lost 40% of their value, and there's no obvious end in sight. Nobody's spending, even if they still have jobs and can still afford their mortgages, because they're scared shirtless. So to speak. Not to mention the fact that all the credit card issuers (which, to be honest, is the main source of consumer credit in this country) have raised their rates and lowered their credit ceilings.
Is it really necessary for me to explain why offering to buy up bundled securities of credit card and auto loans isn't going to make the American consumer go back out and buy that flat-screen TV?? Apparently it wasn't obvious to Mr. Paulson.
Does Mr. Paulson honestly not understand that nobody is buying houses because house prices are still losing 17.4% a year (per today's Bloomberg article)? Who would go into debt for hundreds of thousands of dollars for an asset that may be worth less next year than what you owe on it? After all, he's supposed to be a brilliant investor.
I'm afraid my paranoia is getting out of control again. I actually just had the thought that Paulson is doing this (assuming he actually has a reason and isn't just flailing) in order to pump the government deficit to even more ridiculous heights, in a deliberate attempt to hamstring the incoming Obama administration's efforts to fix the economy. If I can't fix it, says Hank, it's not going to be fixed.
On the other hand, maybe he's just flailing. That would explain why he never explains what he thinks he's doing.
I flagged this post "we can do this better" - but I have to admit I don't know what we could be doing better. I'm just sure that everything I've seen the administration do to date has not worked, and has not worked for fairly obvious reasons, like being poorly thought out and badly designed. I still think we should force an audit of all the outstanding credit default swaps, publish the results, and let the chips fall where they may. It would destroy a number of insolvent banks; but they're probably going to die eventually anyway, and at least it would make clear where everyone stands.