Experts concerned by consumer credit plan

US Secretary Treasury Secretary Timothy Geithner delivers remarks on his plan to restore stability to the US financial system February 10, 2009, in the Cash Room of the US Treasury Headquarters in Washington. AFP Photo/Paul J. Richards (Photo credit should read PAUL J. RICHARDS/AFP/Getty Images) less US Secretary Treasury Secretary Timothy Geithner delivers remarks on his plan to restore stability to the US financial system February 10, 2009, in the Cash Room of the US Treasury Headquarters in Washington. ... more Photo: Paul J. Richards, AFP/Getty Images Photo: Paul J. Richards, AFP/Getty Images Image 1 of / 1 Caption Close Experts concerned by consumer credit plan 1 / 1 Back to Gallery

Treasury Secretary Timothy Geithner proposed to put a trillion dollars into a program to boost the supply of consumer and small business credit Tuesday, but experts say the government has not yet proved it can carry out that aspect of its plan.

The consumer credit provisions are part of a larger bailout plan that could cost more than $2 trillion, which he announced Tuesday at the Treasury and laid out later before the Senate Banking Committee.

Geithner's plan in the financial crisis spooked rather than reassured Wall Street, in part because of a scarcity of details about implementation.

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Geithner's strategy for boosting automotive, credit card, student aid and small business debt involves fixing one of the most complicated mechanisms in the country's broken financial system.

As Geithner explained, nearly half of the credit that flows to consumers and small businesses comes from the sale of asset-backed securities - similar types of loans that are packaged and resold to pension funds or other institutional investors.

Economic analyst Jane D'Arista, with the Financial Markets Center think tank, said these asset-backed securities might be bundles of student loans, small-business accounts receivables or credit card balances.

Since the 1990s, a wide assortment of lenders have used asset-backed securities as a way to replenish their funds for loans, by selling off those bundles, she said.

Economist Brian Bethune with IHS Global Insight said this consumer credit mechanism began to break down last year after the defaults on subprime mortgages caused a panic in the mortgage-backed securities market. Investors stopped buying any kind of debt that was bundled, or securitized, whether it was mortgages or credit cards.

"This dried up the availability of car loans, student loans and small-business loans," Bethune said. "Lenders started to ration the credit that was available."

Geithner said Tuesday that the amount of consumer credit flowing through asset-backed securities decreased by $1.2 trillion between 2006 and 2008.

To fix this credit recycling mechanism he proposed putting $100 billion of the remaining bank bailout funds authorized by Congress into a special Federal Reserve fund. That cash infusion would allow the Fed to finance the purchase of up to $1 trillion worth of new asset-backed securities, Treasury and Fed officials say.

This is not a new plan. Geithner expanded a commitment that former Treasury Secretary Henry Paulson made in November when he promised to give the Fed $20 billion of bailout funds to finance the acquisition of up to $200 billion in asset-backed securities.

In addition to the increase in the funds, Geithner said the program would include more asset bundles crucial to small businesses.

But experts note that the Fed has not yet started using the money pledged in November nor announced when this larger program will go into effect. That delay is part of what roiled Wall Street on Tuesday.

Steve Brown, president of Pacific Coast Bankers' Bank, a specialized financial institution in San Francisco, said the expansions would help consumers and small companies.

"The government is doing the best it can, but some of this is trial and error," he said.

Professor Jim Wilcox, an expert on financial institutions at UC Berkeley's Haas School of Business, said that once the asset-purchase program gets under way it should revive this mechanism that has been used to raise new money to lend.

"I think we could very easily see the effects of this in the summertime in the form of easier consumer credit," he said.