Banks aren't lending with bailout money

Democrats support bailout money for student lenders and consumer-based institutions.

By Andrew Denney

Published Nov. 14, 2008

The bailout of the country's financial institutions, approved in October, could stretch to include student lenders and other consumer-based institutions, the Secretary of the Treasury announced Wednesday.

Treasury Secretary Henry Paulson said in a speech on Wednesday that about 40 percent of consumer credit is provided through credit cards, auto loans and student loans, but illiquidity in those markets is raising their cost.

"This is creating a heavy burden on the American people and reducing the number of jobs in our economy," he said.

MU management professor Karen Schnatterly said the move is an attempt by the Treasury to loosen up credit by encouraging banks to increase lending. She said that despite the approval of the bailout plan last month, banks have not been willing to expand lending.

"The government is telling them to lend more, and they have elected not to do that," she said.

The bailout plan, first rejected in the U.S. House on Sept. 29, passed overwhelmingly in the U.S. Senate and passed on its second vote in the House later that week. It granted the Treasury $700 billion to purchase assets from the country's top lenders.

Of that amount, $250 billion has already been allocated for the purchase of assets of various lenders and $40 billion has been used to buy a stake in the American International Group. That leaves $410 billion to invest in banking and non-banking industries.

Democrats in Congress, including President-elect Barack Obama, have supported the modification of the bailout plan to include non-banking entities, chiefly the automotive industry. Democrats have proposed to give the auto industry $25 billion from a measure approved in September to build fuel-efficient vehicles.

MU Financial Aid Director James Brooks said the issues do not currently affect most MU students because the school participates in the Federal Direct Loan program, which borrows funds from the government instead of private lenders.

MU finance professor Robert Weagley said in an e-mail that loan markets of all types are being adversely affected by the financial conditions. He said he is confident that college students, through "their creativity, coupled with the freedom to pursue their economic dreams, will pull us out of this current crisis."

"It is important, however, that students realize that the loans are for investment in themselves, not for supporting a lifestyle that is transient," he said. "Then, to receive the greatest return on that education, they have to put more of themselves into their education."