Fed’s “White Horse” Bailout of GMAC Enables Consumer Credit Habit & Stabilizes GM

The U.S. Treasury’s decision to inject $6bn worth of capital into GMAC allows the auto financer to broaden its distribution lending base to customers with minimum credit scores of 621 versus its previous standard of 700. This sounds counter-intuitive as cheap and easy credit is what precipitated today’s financial crisis. Then again, desperate times call for desparate measures.

The American consumer (economy) became addicted to the cheap and easy credit pushed by former Fed Chairman Greenspan and the Bush administration. Withdrawal symptoms have been nothing short of excruciatingly painful, e.g. massive writedowns, rising unemployment, and contracting GDP.

The Fed has thrown everything but the kitchen sink at a problem that has stubbornly refused to yield progress. Cold turkey is not an option as credit junkies and their Wall Street enablers fear that it would kill the patients (consumers and the economy). Yet, the morphine and methadone administered by the Fed’s acronymous programs, e.g. TARP, seem to lack sufficient potency. Any good pusher knows that a dead-addict (customer) is bad for business. Better to keep the addict alive so one can cheat him again and again and again. In this case, the customers are consumers while the pusher represents myopic greedy bankers who lack the patience and innovation to create sustainably profitable products independent of high leverage. Their kingpin dealer, or the Fed, is the only one riding the white horse these days and monopolistically controlling the distribution of supply (i.e., cheap money and bailouts).

Despite the above criticism, I will admit that this latest move by the Fed probably will stimulate auto sales and more importantly, grant reprieve from the bankruptcies and potential job layoffs that stare down auto manufacturers and their supply chain industry. Besides, this manufacturing infrastructure is just as vital to U.S. economy as the little pieces of monopoly paper that Wall Street trades back and forth with one another on a daily basis. In the big picture, the economy will eventually digest this orgy of cheap credit and government bailouts. But when it does, the “fit will hit the shan” with the excretion of high inflation. (Now there’s something that would really stink to high heaven for our progeny and long term U.S. treasury bonds.)

In the meantime, General Motors’ (GM) common stock should find support from buyers and short sellers over the short to intermediate timeframe. Anyone hungry for a bargain might want to skip the appetitzers and go for the GM while it’s still bloody rare. However, just don’t over-indulge as the reputed risks involve more than just heartburn.

By J Clinton Hill (Market Direction Strategist & Analyst for Hillbent.com)

Originally published at Hillbent.com and reproduced here with the author’s permission.

2 Responses to "Fed’s “White Horse” Bailout of GMAC Enables Consumer Credit Habit & Stabilizes GM"

  1. Guest   January 5, 2009 at 10:45 am

    Will Bernanke and Paulson’s plan to re-inflate the US debt bubble economy work? Not a snowball’s chance in hell.http://www.atimes.com/atimes/Global_Economy/JL25Dj02.htmlThe United States lived in Lever-Lever Land too long. Like Peter Pan, the country has refused to grow up. The object of the stimulus plans offered by the present and the next US administrations is to return to Lever-Lever Land, that is, to debt-financed consumption. It won’t work. Leverage is for the young, who borrow to build homes and start businesses. The financial crisis forces Americans to act their age, that is, to save rather than borrow and spend.America’s leaders haven’t yet had the required moment of clarity. Its financial leaders still think the problem is a mere matter of confidence. These were the same people who swallowed their own sales pitch.Aging workers, who soon will predominate in the American workforce, missed their chance to accumulate savings for retirement and education during the boom years of 2002-2008. Instead, they borrowed cheap money from foreigners and gambled on real estate. Many analysts have drawn attention to the link between America’s zero-percent personal savings rate and the current account deficit. Americans’ home equity probably is worth half of what it was three years ago, and fall a great deal further. If they had a retirement savings plan, it is probably down by 40% or so. If they still have a job, they need to save as much as they can and make up for lost time. All the stimulus in the world won’t persuade them to spend now that they know that they can’t retire on the price of their houses.America will endure a lost decade more depressing than Japan’s during the 1990s.

  2. Steve   January 9, 2009 at 11:14 am

    The Fed could ask to what extent does it want its credit program to shift resources between borrowers. If interest reflects the cost of credit (which now that GMAC is a bank it should) then the cost of making loans to borrowers more likely to default will be carried in the form of higher rates to borrowers paying on time.Reducing credit standards may be important because we all are less creditworthy now. But trying to get us to buy an unnecessary SUV in order to bail out Detroit ignores the bigger problem that we’ve been overspending. Our previous car purchasing behavior is not a status quo that we should restore, even if the taxpayers (through congress) have gotten “half pregnent” by letting the big three spend our money between now and March.My guess is that as soon as GM’s continuity has been established, GMAC will seek to give up its banking license and go back to promoting unnecessary car purchases through “limited time offers” of 0% interest rates. I hope not.