Dean Baker
TPM Café (Talking Points Memo), November 16, 2008

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Remember way back in October when all right-minded people supported Treasury Secretary Henry Paulson's bank bailout package, which went under the name of Troubled Assets Relief Program (TARP)? Those of us who thought it was poorly designed as a mechanism to help the financial system, and was likely to lead to taxpayer enrichment of the extremely rich, were denounced as knuckle-scraping Neanderthals.

Of course Paulson changed course a week after he got his bailout bill and decided that the best route was to directly inject capital into the banks, as advocated by the knuckle-scraping Neanderthals. Last week the knuckle-scraping Neanderthals could claim a second victory as he announced that the TARP program was officially dead, RIP.

But in Washington, no bad idea stays dead for long.

Paulson also announced plans for a son of TARP program. Under this program, Paulson would buy up securities that are backed up by car loans, student loans, credit card debt, and other forms of consumer borrowing. The rationale is the same as was given for TARP - the market for these assets has collapsed as a result of soaring default rates. Ostensibly, this collapse lies behind the falloff in consumer lending and the plunging consumption of the last few months.

There is even less reason for the government to get in the bad consumer debt business than the bad mortgage business. Consumer lending has plummeted for two reasons. First, consumers are much less creditworthy today than they were a year ago. Tens of millions of homeowners who had substantial equity in their homes a year ago have little or no equity today.

A person with $100,000 in home equity will not default on a car loan or credit card debt. A person with zero home equity, and no other financial wealth, is a serious default risk. It's no surprise that financial companies are much less willing to lend to consumers in the current economic environment.

The other reason that borrowing is down is that homeowners realize that they have to start saving. Tens of millions of homeowners are approaching retirement with no pension, no savings and no equity in their home. Is it any surprise that these people would suddenly place a priority on saving?

Paulson's plan will not revive consumer spending and provide any noticeable boost to the economy. It is simply another way to give money to the financial industry, as Treasury will presumably overpay to acquire tens of billions of dollars of securities backed by consumer debt. It's a good deal for the financial sector, but it's a ripoff for the rest of us.

Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer. He also has a blog on the American Prospect, "Beat the Press," where he discusses the media's coverage of economic issues.