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

Alan Greenspan gives somber testimony

The House Committee on Oversight and Government Reform held a long meeting on Thursday in Washington to discuss the current financial crisis with figures like former Chairman of the Federal Reserve Alan Greenspan and former Secretary of the Treasury, John Snow.

At the meeting, Greenspan acknowledges that he may have misjudged the regulatory abilities of the free market.

In response to comments by Representative Henry Waxman, the chairman of the House Committee on Oversight, Greenspan referenced the error.

“I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms,” he says.

Video of his testimony is available through CNBC in conjunction with the New York Times here.

Greenspan testified before the Committee on Oversight so that the committee would better be able to identify how the regulations already in place did not prevent the current financial situation. During his service from 1987 until 2006, Greenspan was a strong proponent of deregulation. His position on derivatives, which are playing a role in the current crisis, has been criticized by some as too lenient.

By the end of his term, the use of derivatives by financial institutions had become widespread and complex which resulted in widespread exposure to risk.

Perhaps in an effort to emphasize the potential for future problems, Greenspan says he “cannot see how we will avoid a significant rise in layoffs and unemployment.”

Click here for the video.

--Bridget O'Sullivan

Life after the US economic meltdown

As several of Wall Street's most storied firms have been forced to close up shop over the course of the past few weeks, many investors are now left wondering what to do next.

However, a truly savvy individual could find some bright spots amid all of the turmoil.

Boston.com spoke with several successful investors and got their perspectives on how to weather the storm.

Mohamed El-Erian, co-chief executive of Pacific Investment Management Company, cited funds that own government-guaranteed mortgages but offer a higher return than the government does.

Peter Lynch, the former manager of Fidelity's flagship Magellan mutual fund, tells the Globe that the average investor should not focus on trying to choose individual stocks without extensive market knowledge and research.

"The term 'play the market' has done so much damage," he says.

The better strategy, he suggests, is to get to know a few companies very well. That more specialized knowledge would allow the investor to understand the movement of the prices of those stocks.

Even though some stocks may seem as though they are on sale right now, it can be very difficult for a person who has not done a lot of research to determine which ones will bounce back and which ones are headed for more long-term decline.

Click here to read more.

--Bridget O'Sullivan