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.