Government to Spend $200 billion to Unclog Consumer Lending Market

That the Treasury made yet another move after the Trouble Asset Relief Program (TARP), Federal Reserve interest rate cuts, and other rescue efforts “speaks volumes,” Dan North, chief economist at Euler Hermes, a trade credit insurance firm, told insideARM.

“There’s a crisis of confidence,” North added. “Once Obama is sworn in, things might settle down. It’s a good thing that he picked [Tim] Geitner as Treasury Secretary; the markets liked that. It was a good, solid pick.”

But while President Bush and Henry Paulson are still in charge, the credit markets are likely to remain in their current logjam, according to North, who accused Paulson of changing directions between stating his case for the TARP and its intended use of an approved $700 billion and actual receipt of the funding. Changing the plans for the funds indicates the plan was not well thought out.

The latest move continues that trend of announcing one plan of action then changing to another, North said. “It’s part of a scattershot approach. I don’t feel that it was well designed. I don’t think it will help that much.”

The ABS loan facility could provide some additional liquidity, said John Jay, senior analyst at Aite Group. “That the issuance had fallen to literally zero is very telling,” he noted

The student and consumer loan markets had been as fluid as mortgages before the credit market troubles of the last several months, Jay added.

“From the investor perspective, this should loosen up the markets a bit,” Jay said, pointing out that the one-year facility provides lenders with a backstop.

In addition to the $200 billion pledged to free up consumer lending, federal agencies also announced Tuesday that they would spent as much as $600 billion purchasing and guaranteeing the mortgages and mortgage backed securities of Fannie Mae and Freddie Mac, which the intent to free up mortgage lending to consumers.