Sec. Paulson’s Plan For Credit Card Bailout Criticized

December 22, 2008

The current sentiment among many economists regarding the latest twist in Treasury Secretary Paulson’s handling of the $700 billion bailout fund is dark indeed. Any suggestions that the money should be used to stimulate auto lending and credit card issuance is severely frowned upon and considered unnecessary.

This point is based off the relative buoyancy of the credit card and auto lending markets during the course of the credit crisis. Credit lines are still being made available, and at higher limits than may have been accessible during the previous year. Consumers are still getting cards and using them to buy more.

At the same time, reports are noting that many of the major card issuers are starting to retool their policies to place restrictions on those who can obtain credit cards, particularly those borrowers considered high risk. Still, the industry as a whole has remained remarkably accessible and card usage may be reaching record levels.

With Paulson’s plan facing such harsh criticisms, the Treasury Department has remained on the fence about finalizing the package. Paulson is considering how best to use the funds as well as resources made available by outside investors to purchase credit card, auto loans, and other consumer debt, minus mortgages. The means to finance these types of debt, called securitization, has come to a standstill like the rest of the banking sector. Secretary Paulson is hopeful that his bid to purchase debts directly will be a better force to stimulate lending rather than buying bank shares and forcing them to offer loans.

The question on minds of economists is, “Why is buying credit card and auto loan debt better or simpler than buying mortgage bonds?”

Since credit cards are unsecured debt, buying up credit card debt is a precarious use of the taxpayer’s money. If the borrower must default, there is no collateral to help recoup losses. Better still, you can eliminate credit card debt by declaring bankruptcy, while you cannot do the same with a mortgage.