Focus Switching To Consumer Side
The Treasury is scrapping plans to purchase illiquid mortgage assets and will switch it’s focus for what’s left of the $700 billion aid package to the consumer side. They want banks to start lending again and a number of federal agencies are teaming together to try to just that.
The agencies expect all banking organizations to fulfill their fundamental role in the economy as intermediaries of credit to businesses, consumers, and other creditworthy borrowers. Moreover, as a result of problems in financial markets, the economy will likely become increasingly reliant on banking organizations to provide credit formerly provided or facilitated by purchasers of securities. Lending to creditworthy borrowers provides sustainable returns for the lending organization and is constructive for the economy as a whole.
I think they are finally starting to see the bigger picture. Nothing is going to get better while the housing market is still in the dumps. People need to be buying homes and banks need to be lending them the money to for things to get better.
The foundation of the banking system is the people, they are the ones who are depositing the money and they are the ones who need access to that credit first. With consumer spending making such a big chunk out of GDP, you can’t choke off the roots and expect the economy to keep growing.
They can’t concentrate on keeping individual companies from failing, that’s just going to get expensive fast and really won’t help matters in the long run. They need to start at the base and work their way up.
We are already seeing the start of this as a number of companies have instituted mortgage restructuring programs in attempt to slow climbing foreclosure rates. The growing number of bank owned properties only serves to swell supply and damp down prices even further.
The global effort to re-capitalize the banking system is slowly paying off and interbank rates are starting to fall once again. But the damage has already been done and it will take time for the economy to recover from last month’s financial shocks.
In the meantime consumer spending is expected to take a huge hit in the next few quarters and the faster the government can get consumer lending back on track the better off we will be.
