Government's New Credit Plan Seeks to Boost Consumer Spending

By Peter Whoriskey and Nancy Trejos
Washington Post Staff Writers
Wednesday, November 26, 2008

The government's announcement yesterday of a $200 billion plan aimed primarily at supporting the markets that supply financing for consumer loans is meant to boost consumer spending and, in turn, keep the economy going.

Under the program, the Federal Reserve will lend money to firms that provide student loans, auto loans and credit cards as well as loans backed by the Small Business Administration. Those sources of financing have all but dried up, Treasury Secretary Henry M. Paulson Jr. said in announcing the effort.

"The market essentially came to a halt in October," Paulson said. "As a result, millions of Americans cannot find affordable financing for their basic credit needs. And credit card rates are climbing, making it more expensive for families to finance everyday purchases. This lack of affordable consumer credit undermines consumer spending and, as a result, weakens our economy."

Because the Fed is limited by law in its ability to lend money that might not be paid back, the Treasury Department will put up $20 billion from its $700 billion financial rescue program to protect the Fed against losses on the loans. The lending is scheduled to begin in February.

Financial analysts said they viewed the government effort to ease consumer credit as a step that will encourage spending. But some discounted how powerful its effect might be on the economy.

The securities being backed by the new program ''are a fairly small wedge of the overall financial pie,'' said Jim Vogel, a debt analyst at FTN Financial. ''The government sees there is something they can do there. No one will disagree with this but no one is going to say, 'Thank goodness, they're finally going to solve that problem.' "

Some lenders reacted cautiously to the announcement. "We're still working through the details of the program," said Joanna Lambert, a spokeswoman for American Express. "But assuming we are eligible, we would be supportive and take advantage of the opportunity to further diversify our funding sources."

A spokesman for the American Bankers Association said the group was studying the proposal. "This is a prudent effort on the part of government to unstick a market that is reacting more on fear than on fundamentals. We're hopeful that it will work," said Ken Clayton, the association's senior vice president for credit card policy.

Consumer advocates also reacted guardedly.

On the one hand, some said, it would free up credit for people when they need it the most.

"In this economy, where wages are flat, jobs are being lost, people are going to be relying more on their credit cards and that's why this is critical action if it works," said Ed Mierzwinski, consumer program director for U.S. PIRG.

On the other hand, encouraging them to spend when jobs are precarious and debt levels are already high could be dangerous.

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