Hey, This New Consumer Bailout Is Actually Smart

The new consumer Trash Asset Removal bailout is actually smart. 


Because it will:

  • Restart the securitization markets
  • Allow lenders to shovel more trash assets off their balance sheets (via securitization)
  • Incent lenders to make more trash loans to consumers (which they will then shovel off their balance sheets)
  • Reduce mortgage rates (through the buying of Fannie and Freddie debt and creating demand for the loans)
  • Reduce rates for other forms of consumer credit (credit cards, auto loans, etc.) by creating demand for these loans 
  • Potentially, trigger a new refinancing boom that will enable to consumers to get out from under onerous adjustable rate mortgages and other debilitating mortgage products and pay less of their incomes in debt service.

At $800 billion, the program is also large enough to make a difference.  $800 billion will allow the Fed’s trash-asset Disposal to swallow most of the “products” (loans) the lenders can sell in a year. And because the lenders know they have someone to sell the loans to, they have more incentive to make them.

Will the program immediately fix everything? 


Why not?

Because consumers are still violently overleveraged. The new program will enable them to replace existing debt on better terms and reduce debt service costs (which will help), but it won’t likely increase their borrowing capacity again. At least not overnight.

John Carney also raises the question of what will happen when the Fed STOPS buying all these trash assets (and, thereby, stops subsidizing the market). We’ll cross that bridge when we come to it.

Below, some charts from Barclays analysts, who are very bullish about the bailout:

Next: $500 billion for mortgage-backed securities will allow the Fed to buy a whole year’s-worth of issuance.  Barclays also thinks this purchasing power could reduce mortgage-rates by 50 basis points.

The reduced mortgage rates could encourage homeowners to pay off debilitating adjustable rate mortgages:

The $200 billion for asset-backed securities, meanwhile, will cover a year’s worth of issuance in this market as well.

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