Why Does Paulson Want Us to Keep Piling Up Debt?

Bailout Nation turns to consumers today, as Treasury Secretary Henry Paulson prepares to announce a new program to encourage lending for auto loans, student loans and credit cards, the Wall Street Journal says.

The government basically is creating a lending facility, run by the Federal Reserve, to provide loans to investors who want to put their money into securities backed by this kind of lending. The idea is to get financing and credit moving again to consumers, who have found credit harder to get as banks tighten standards or decline to lend. The program will cost between $25 and $100 billion, with funds coming from the $700 billion rescue plan.

From the Journal:

After Citigroup’s big rescue, it’s hard to complain when consumers finally get their turn. I know we need to get credit moving to help the economy. I’m just not sure bailing out consumer spending is the smartest way to do it.

Consumers have spent the last decade piling up debt, taking out equity from their homes to spend as they like, and living off their credit cards. Isn’t that at least part of the reason we’re in the mess we face now? As Bob Lawless of creditslips.org pointed out when Paulson first talked about this idea, maybe it’s not such a great idea to spend our way out of trouble, once again.

Instead of encouraging consumers to take on more debt, maybe someone in the government could actually be straightforward and say what needs to be said. We’ve been living off bubbles in the recent past, first the tech bubble, and then the housing bubble. Our wealth hasn’t necessarily come from things we’ve made or produced. It’s come from spending and debt. And that just can’t continue.

Paulson doesn’t have the credibility to do it, given his hand in all these bailouts. But maybe President-elect Barack Obama, who has been willing to actually utter the word “sacrifices,” should. In all the talk about the stimulus proposals and job creation, maybe Obama could make clear what economists know but politicians won’t say. We’re in for a different standard of living, an era of diminished expectations. There will be no easy money from playing in the stock market or buying a bigger house. If you want to pile up bills on your credit card, you will have to pay them off the old-fashioned way, a paycheck at a time.

Consider Kurt Seastead, the Prince William County homeowner in our TWI story on Monday. He had a dream house, on 10 acres near Virginia’s pristine horse country. When he got in trouble, he traded down, for a house and a mortgage payment half the size. He benefited from someone else’s foreclosure, buying their house at a bargain.

Welcome to the new America. You may need to give up what you have, if you’ve reached for too much. But you’ll be Ok. It’s better, in the long run. You’ll live in a house you can afford. You’ll save for what you need. You won’t feel that artificial sense of being wealthier than you really are, the way you used to, when you thought your house would only go up in price or your stock market investments would only grow at a rapid pace.

Obama still has the good will to do this. Talk to adults as if they are adults, and they’ll listen. But instead of hard truths, we’re getting a government-run effort to increase lending. Maybe we need it, in the short run, to loosen up the credit markets. But in the end, what we really need is a reality check, if there are any politicians out there brave enough to deliver it.