RebelCapitalist: Financial Information for the Rest of Us

Did They Get This All Wrong?

Dec 30, 2008 | By: Mr_Blue | Comments | Permalink | Tags: bailout, financial crisis, economy, gmac

GMAC was approved for TARP Bailout Money yesterday. A spokesman for GMAC said this morning that with the new capital Bailout Money they would immediately loosen their credit criteria and start lending to consumers. Wait a minute, there is something strange about that. Didn’t loosening of credit criteria get us in this crisis in the first place? And even with more credit available are people going to buy a new car if they are worried about having a job? Did Treasury, President and Congress get this bailout all wrong?

GMAC is doing what the Treasury Department expected of the financial institutions that received Bailout Money – to make loans. GMAC seems to think that it must loosen its credit criteria by lowering the borrower’s credit score requirement from 700 to 621 in order to get people to buy cars and make loans. This is strange considering that lowering credit criteria and lending standards got us into this mess.

People are not going to buy cars with unemployment high and consumer confidence at an all-time low. All the credit in the world is not going to help if people don’t want to buy stuff like cars because they are worried about their jobs. The Treasury Department and Secretary Henry Paulson believe that providing Bailout Money to financial institutions would result in those financial institutions making money available to lend. But if there is no business activity because no one is buying stuff, having all this money doesn’t matter.

Did they get this all wrong? The problem in the beginning was a lack of confidence – banks did not want to lend to anyone because they did not have confidence in the survival of the borrower. Giving away hundreds of billions of dollars does not address the confidence problem. Now, we have a situation where we, the consumers, who drive our economy, don’t want to buy things because we are worried about our jobs.

The problem with toxic mortgages is still present. We have not addressed this problem and people are losing their jobs. The solution provided by Henry Paulson and President Bush is indicative of their ideology that “free markets” will solve this crisis. They are wrong. We may have wasted or at least tied up trillions of dollars for nothing.

We need to focus on the problem – mortgages and mortgage-backed securities. We need to get people back to work through a true stimulus package that provides jobs. Lending more money or providing more credit is not going to get us out of this mess.