Yesterday, the Federal Reserve and the Treasury Department unveiled a new plan to “help” the economy. Not only is the government going to take on more mortgage debt obligations from Fannie, Freddie and Ginnie, but there is a plan to encourage more consumer debt.
The idea is to, through TARP, encourage investors to buy consumer debt backed securities. These are securities that package things like credit card debt, auto loans and student loans into tradeable securities. Investors earn money as consumers pay back their debt.
With credit tightening, there are fewer people getting approved for credit lines. Indeed, some people are even seeing their credit card limits reduced — along with freezes to their HELOCs. This means that spending power is being reduced for consumers. On top of that, some consumers are finally waking up and realizing that things are Not Good. All sorts of renewed vows to cut up the credit cards are being spoken, and many are rethinking their spending habits.
All of this has the government worried. Our economy has shifted to one that is debt-based. It all runs on consumers spending money they don’t really have on things they don’t actually need. Part of the economic downturn is due to limited spending power because of restricted credit. The latest incarnation of TARP is designed to encourage lenders to start extending credit again so that consumers can continue on their debt-fueled spending sprees.
Don’t fall for it.
Right now, our economy is set up so that what is good for the economy is bad for individual finances. This is a wake-up call. Practice sound personal finance habits: Save, get out of debt, earn more than you spend. Even if credit becomes easier to get again in the coming weeks and months, don’t take the bait. After all, easy credit is what got us in this mess to begin with.