Roughly a year after Washington came to the rescue of the big dogs in American finance, it seems the difficulty in securing loans has not let up one bit. It is easy for people to say that the problem lies with banks, as they are quite wary about extending credit to consumers right now. Yes, part of the problem does lie with banks and other lending institutions. However, the problem actually goes much deeper than that.
Debt-securitization markets are still in an alarming state of disarray, for one. During recent years, these markets were actually the source of approximately 60% of used credit in America so these markets can indeed reach a high figure. Because of the state of disarray that the markets are in, getting successful loan applications are resultantly scarce in the market, which is actually a strong threat towards economic recovery. Moreover, a large portion of these markets maintain operations for the sole reason that the government is giving them the funds to do so.
Debt-securitization markets are the ones that finance home mortgages, corporate loans, student loans, and lots more. Before the onset of the global recession, debt-securitization markets worked hand in hand with banks, packaging their loans into securities, and then reselling these packaged loans to investors. The overall process of packaging and reselling is dubbed as securitization, which enabled banks and lending institutions to lend more money to more people.
Presently, however, the Federal Reserve has already given these markets notice that it is planning to withdraw financial support. The policymakers, in turn, are hoping that the markets are financially stable enough already and that private investors will start investing in them once again.
On the part of government officials, they do realize that a delicate balancing act should be implemented so as not to make the exit of financial support to abrupt. Lee Sachs, in particular, shares that this has to be done in increments and that the exit should not be implemented a moment sooner. Lee Sachs is actually one of the counselors to Timothy F. Geithner, the Treasury secretary.
Given the relationship of securitization markets and bank lending and credit extension, there can never be enough room for economic recovery and growth until such a point where securitization markets are able to reestablish themselves in the credit industry already. Only then would there be stronger chances of economic recovery and, hopefully, the extension of credit lines, the increase of credit limits, and the overall nature of credit usage would be able to recuperate.