The actions taken by Treasury, the Federal Reserve and the FDIC in October have clearly helped stabilize our financial system. Before we acted, we were at a tipping point. Credit markets were largely frozen, denying financial institutions, businesses and consumers access to vital funding and credit. U.S. and European financial institutions were under extreme pressure, and investor confidence in our system was dangerously low.
In today’s speech, Secretary Henry Paulson provided a detailed update on the progression of the Financial Rescue Plan, and a description on how the government will use the money, through the Capital Purchase Program. Paulson also stated that the plan to buy mortgage assets and CDOs, once the cornerstone of the rescue plan, was as good as dead.
We announced a plan on October 14th to purchase up to $250 billion in preferred stock in federally regulated banks and thrifts. By October 26th we had $115 billion out the door to eight large institutions. In Washington that is a land-speed record from announcing a program to getting funds out the door. We now have approved dozens of additional applications, and investments are being made in approved institutions.
He continues by advocating banks to lend that money:
Although this program’s primary purpose is stabilizing our financial system, banks must also continue lending. During times like these with a slowing economy and some deterioration in credit conditions, even the healthiest banks tend to become more risk-averse and restrain lending, and regulators’ actions have reinforced this lending restraint in the past.
It’s a natural response for banks to be more risk-averse during times like these. I don’t know if lending more capital, and by extension, getting into more debt, is the answer to our economic problems. Risk aversion and savings are huge positives in the structure of an economy, as the former will deter this from happening again and the latter will propel us to new economic heights. So why is the Treasury still striving for an artificially grown economy, supported by a debt-laden society?
Read the Full Paulson Speech.