New Federal Program Aimed to Help Consumers Obtain Credit

A new program by the Federal Reserve is aimed at making it easier for consumers to get credit cards and auto-loans. These loans might not necessarily be at lower interest rates but should be easier to obtain. The goal of the Fed is obviously to loosen credit markets and once again spark consumer spending. Next month the U.S. central bank will begin offering up to $200 billion in loans to investors that have AAA-rated securities backed by new consumer loans and small business loans as well. The lack of credit available for both consumers and businesses has devastated our economy. In order for our country to come out of this recession we will need to make credit available again for consumers.

Credit card companies have been cutting back on the number of new customers as investors have fled the purchase of credit card bonds. The amount of new credit card solicitations has almost completely gone non-existent. Card issuers are now pulling out of many affiliate-marketing programs as well. Credit card affiliates direct new customers to card issuers who in turn pay a commission to the website should the application is approved. However, since November of 2008 many card issuers have been removing certain card offers from the affiliate marketing channel. However, as market conditions worsen, some card issuers have completely pulled out of the affiliate channel. Bank of America, Chase, American Express, Citigroup and new Capital One has either pulled out completely or partially from affiliate marketing channels.

In addition to acquiring fewer customers, card issuers have also cut back lines of credit for existing customers. The lack of credit availability has created a domino effect across every sector of the economy. Consumers have been spending less due to the lack of credit. The lack of consumer spending then causes retailers to cut back on employees, thus continuing the loss of jobs.

The flow of credit back to consumers will spur spending once again. This new program by the Federal Reserve is supposed to address the lack of consumer liquidity directly. Credit card issuers rely on the purchase of credit card backed bonds in order to continue lending. Credit card companies do not keep loans on their books. They sell the loans on Wall Street as bonds. The idea behind the Federal Reserves new consumer lending program is to get investors purchasing consumer loan type bonds. This includes car loans as well.

Our country needs credit to help sell products. The auto industry has also been devastated by the credit crisis. Every automaker from General Motors to Toyota has experienced losses never seen before. Car dealers do not blame the lack of traffic into their dealerships for the lack of sales. They are unable to obtain financing for a large percentage of new customers. Carmakers have been forced to shut down production in order for dealerships to sell off excessive inventory. The plant shut downs have affected the entire automotive supply chain. Point Logistics, a dedicated trucking company for General Motors has seen a 50% decrease in its business. This has forced the company to cut back on employees and reduce hours as well.

As I have said many times before, the Obama administration has a very difficult job ahead of them. The new government spending initiatives are aimed at creating new jobs. Consumers without employment can not pay debt, nor can they make major purchases, such as automobiles and other higher dollar goods. I am hopeful that the new administration will succeed at restoring our economy back to normal.


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Labels: consumer loans, consumer spending, credit card bonds, credit cards

Why the Government Should Invest in Credit Card Bonds


The credit card industry has taken a significant toll since the onset of the credit crisis. Direct mail credit card marketing has seen a significant drop in the amount of mail being sent. Credit card issuers have pulled cards away from the affiliate marketing channel as well. The problem is that card issuers are having a hard time securitizing credit card debt. By that I mean, that credit card issuers are having less success bundling credit card debt and selling it off as an investment in Wall Street in the form of credit card bonds. The sale of credit card bonds is down 50%, thus so are approvals. The credit card industry needs to be able to be able to sell their receivables in order to generate new customers. As part of the economic stimulus package I think the Obama Administration should start buying up credit card bonds. This way consumer credit is unfrozen and people can go out and spend once again. Credit Card liquidity is needed in the economy in order to keep people shopping. The Obama administration needs to invest in credit card bonds and thus increase the spending power of the American consumer. Consumer spending via credit cards creates jobs in every sector of the economy from retail to logistics.

Retail spending has seen a significant drop off because of the credit crisis. More Americans these days putting their money back in the cookie jar. Even though some people have money they are not spending it. Job uncertainty is at an all time high these days. No one wants to spend money if they fear that job loss is possible. However, part of the reason for all these job losses is that no one is spending money. It is almost like a viscous cycle as well. Spending decreases as people continue to hoard money. Jobs suffer and continued losses occur because people are not spending. The reality is that economic growth happens because of consumer spending; not saving. The credit card industry has made it possible for consumers to spend money. The retail and service industry without credit cards is like the housing market without mortgages.

The Obama administration needs to stabilize the credit card industry as well. Card issuers have seen significant losses due to the credit crisis. The collapse of the mortgage industry has caused significant job loss in the United States. Those who are now unemployed are having a harder time making their credit card payments. In response, the credit card industry has had to reduce spending limits and increase interest rates in order to make up for the losses. This reduction in consumer credit has adversely affected spending. As I stated previously also, the reduction of spending has destroyed the job market as well. The government should invest in credit card bonds and as a condition require that card issuers lend more money to consumers. In order to save the economy we need to re establish consumer confidence and resume lending.

Credit cards have empowered consumer spending for many years. This spending has been the number one factor causing economic expansion. People with credit are able to go to restaurants and stores to spend money. Malls and shopping centers are built in order to facilitate the consumers every desire. Stores are forced to shut down when spending decreases. Circuit City has become the most recent victim to fall because of the credit crisis. 30,000 more jobs have been lost. Circuit City blames its failure on reduced consumer spending and its lack of ability to secure loans. The Obama administration needs to address this problem very soon. Once credit begins to flow again spending will increase, jobs will be created, and our economy will be back on track.

Labels: Circuit City, credit card, credit card bonds, credit card issuers, credit cards