Paulson’s New Program: Giving People Money They Can’t Afford To Spend

The news is as old as the Magna Carta. The consumer is broke. He does not have a dime. He is out of work. He is defaulting on his home equity loan, and the bank has reposed his credit card.  It may be best to let his spending rest while his catches his economic breath.

Henry Paulson has other ideas. He wants to help people to borrow money that they cannot repay, now or in the near future.

According to The Wall Street Journal, "Treasury Secretary Henry Paulson, seeking to ease strains in the consumer credit market, plans to announce Tuesday the formation of a program to increase the availability of auto loans, student loans and credit cards."

The head of the Treasury is concerned that people who want credit can’t get it. But, they can’t afford it either.

The latest program points to the Achilles Heel of the entire $700 billion Paulson program. It provides capital to people, businesses, and programs which cannot be revived by the money nor can they sustain any of the economic improvement which the cash initially brings them. The backing of Citigroup (C) and AIG (AIG)–in the case of the insurance company, not Paulson’s money–has only served to point out that they stand on clay feet. The cause of their problems, which is derivatives and loans tied to failing parts of the economy, cannot be solved by sums which are modest compared to the real trouble. In the case of AIG, the government is already caught in an endless rat warren.

Walking up to the average citizen and offering him more credit is like giving a pyromaniac a match. He so loves the warmth of the flames and the attendant mayhem that he cannot help himself. Passing the consumer more money will only bring more ruin to the credit system.

Douglas A. McIntyre