Earn What You Spend

With all the bailout programs originated in these past few months, I know I’m in need of a cheat sheet to figure out exactly what the government is guaranteeing these days. 

The newest $800 billion dollar program is directed at consumer credit - mortgages, credit cards, car loans.  It includes a purchase of about $600 billion in mortgage debt from both Fannie Mae and Freddie Mac - thereby increasing liquidity in this market, effectively lowering rates, and encouraging new loan origination. As falling home prices are at the foundation of this crisis, this is a welcomed program. 

The remaining $200 billion will go to the other forms of consumer debt - credit cards, student loans, SBA-approved business loans, and car loans. The Treasury intends to lend money to securities corresponding to these types of debt.  This $200 billion in lending is backed by $20 billion in Treasuries, in effect creating a government bank:

The central bank will lend money to investors via big banks known as primary dealers. Investors can use the money to buy AAA-rated securities tied to consumer debt.

The Fed’s goal is to bolster those markets, sparking more lending to consumers and lower interest rates for students, car buyers and others. But if consumer-loan delinquencies rise sharply and these securities default, losses will ultimately fall to the Fed and Treasury.

It’s tough to keep these straight, so enjoy I’d recommend spending some time reading through this bailout cheat sheet from an article in yesterday’s New York Times:

Source: NYTimes

And, of course, Happy Thanksgiving.