Treasury secretary outlines consumer credit plan

Despite the $700 billion bailout plan passed by Congress, financial institutions remain relatively unwilling to extend credit to consumers. Henry Paulson, the Secretary of the Treasury, has described a solution to be administered by the Federal Reserve with the goal of alleviating the credit crunch.

Instead of channeling the funds directly to banks and lending institutions, the Federal Reserve would allocate about $50 billion to make it easier for consumers to secure car and student loans, for example. Though the goal of the plan is to help consumers directly, $50 billion is a relatively low amount compared to the $40 billion already devoted to the bailout of AIG and the $125 billion for the country’s nine largest banks.

The decision to distribute funds in a way that would make them more available to consumers marks a shift in the original plan Paulson proposed in September. The program was designed with the intention of buying mortgage backed securities, or “troubled assets” to give banks more resources to make loans.

In his remarks on Wednesday, Paulson also re-emphasized his stance that the Treasury will not be using the bailout money to help the American automakers GM, Ford, or Chrysler. The House of Representatives, however, is in the process of drafting a bill that could provide support to the car companies.

Barney Frank, the chairman of the House Financial Services Committee commented on the issue to the New York Times. “The consequences of a collapse of the American automobile industry would be particularly troublesome.”

He offers assurance, however, that the legislation would include language to protect taxpayers.

--Bridget O'Sullivan

US injects $250 billion in financial institutions

In an effort to get capital flowing from the government’s $750 billion bailout plan, Secretary of the Treasury Henry Paulson called together the executives of nine of the country’s largest banks for a meeting in Washington.

He announced his plan for the government to buy up a number of shares from each bank. The government is also planning to guarantee and insure more commercial debts and deposits.

Is it a $250 billion band-aid? Perhaps.

According to the plan, the more capital a bank has and the more secure it perceives certain risks to be, the more growth is facilitated. If the market for credit grinds to a halt because institutions are not lending or because they choose to hoard their resources, the more likely the economy will remain stagnant.

"I don’t think there was any banker in that room who was going to look us in the eye and say they had too much capital," Mr. Paulson says in a phone interview with The New York Times in reference to Monday’s meeting with bank executives.

Some of the institutions represent at the meeting are suffering more seriously than others from the current sub-prime mortgage situation. Executives from the less-affected banks reportedly objected to the new plan initially. Others disapproved of the new guidelines related to executive compensation packages.

Ultimately, in a matter of just a few hours, all nine banks had signed on to the agreement. The effects of the deal are unlikely to be seen immediately, however, because it will take time for the newly injected capital to translate into more accessible credit and more growth.

Click here for the complete article.

--Bridget O'Sullivan

Poll reveals pessimistic outlook in Mass.

The Boston Globe reports that residents of Massachusetts don't have a positive outlook on the economy. Recent fluctuations in the stock market, rising inflation and unemployment, and the collapse of several major financial institutions are the likely factors contributing to the pessimism.

Suffolk University and The Boston Globe collaborated to conduct a poll on the attitudes of Massachusetts residents responding to the current economic conditions. The results were tallied before the House or the Senate voted on the bailout plan and before the subsequent days of extreme volatility in the stock market.

Even before any decisions on the rescue plan presented by Henry Paulson had been made by congress, a full 41 percent of those polled said they believed the economy would get worse in the coming year. Only 21 percent were optimistic that the economy would improve.

One particular response recorded by the poll seems to illustrate the challenging economic conditions facing Massachusetts residents. A large number of people responding indicated that although they are trying to cut back on their purchases, they have spent more this year than last year.

Such information suggests that although Massachusetts residents are making fewer discretionary purchases, the cost of necessary items such as food, clothing, and gas has risen considerably since last year. As a result, it becomes harder for households to get ahead because cutting back on unnecessary items will not always translate into savings, and savings are important for a feeling of overall economic health.

To read the Globe article, click here.

--Bridget O'Sullivan