This morning Treasury Secretary Henry Paulson introduced a pair of new programs that will give $800 Billion to help unfreeze the consumer debt market. Mr. Paulson calls this "vital to supporting the economy."
Paulson said in a statement this morning that consumer debt such as credit cards, auto loans and student loans essentially came to a halt in October. These new programs are aimed to get lending back to more normal levels.
Paulson said all the government programs have been aimed at supporting the lending that is vital to the economy.
This whole situation reminds me of the Thanksgiving Day pick-up football games we used to play back when I was a kid. My older brother who played all-time quarterback would bring us into a tight huddle and detail out this genius play which we were going to execute with fine precision. I would cut right, then left, then run for 20 yards, button-hook back and he would provide with a perfect pass right on the numbers. Without fail, my brother would call hike and then immediately abandon the long thought out plan and just run with the ball.
Mr. Paulson is just running with the ball.
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This is reminiscent of Japan's recession in the early 1990's. They tried infusing cash into banks in the hopes that increased lending would add some velocity to the market. What they didn't realize is that lending was not supply-limited but demand-limited: because of diminished confidence, people and companies were stockpiling yen and wanted to reduce, rather than expand, their debts.
The Japanese came up with a great phrase to describe this scenario: "pushing on a string."
I'm curious whether Paulson's strategy will have the same effect. Consumer confidence is at an all-time low (for entirely valid reasons) - sending people more credit card applications may not affect their interest in increasing their consumer (and high-interest) debt...
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