Why isn't the rescue package working?

So even after almost 2.2 billion dollars in Federal taxpayer money being flooded into the financial sector, we are still hearing people complaining that the "credit market is tight", which apparently is a euphemism for "nobody can get a loan!" What!? After we've put over two billion dollars of Federal taxpayer money into the system?

Elizabeth Warren, the chairwoman of the oversight panel for the U.S. "bailout", complained about a lack of a coherent strategy to loosen credit. "You can't just say, 'Credit isn't moving through the system,' " she said in her first public comments since being named to the panel. "You have to ask why."

If the answer is that banks do not have money to lend, it would make sense to push capital into their hands, as the Treasury has been doing over the last two months, she continued. But if the answer is that their potential borrowers are getting less creditworthy with each passing day (empahsis by me), "pouring money into banks isn't going to fix that problem," she said.

I can tell you right now that just based on a couple of phone calls to some friends of mine in the real-estate business that the problem is more likely to be the latter rather than the former. According to an agent that works for Russ Lyon Realty in Phoenix, if you want to borrow to buy a house you better have 20% down (no more 100% financing) and prove that you can afford the loan (in other words, you have a steady job and that the mortgage won't represent more than 30% of your gross income).

Listening to the Rush Limbaugh show today, I heard the guest host (Rush was ill today) that banks reported an overall increase in their liquid cash holdings of between 14% to 18% since the previous year. How can that be unless they are not lending the money the Federal government has pumped into the system?

While this financial crisis is bad, it's nowhere near the level of calamity that befell our economy in the 1930's, where 30% of all banks failed, and 30% of our population were unemployed. However, with our citizens guilty of living a life of immediate gratification and failure to save for the future, it's impact is devastating to millions of households across our nation, not to mention the larger global community.

In 2002 I nearly declared bankruptcy. I won't go into the details, but in order to stave off bankruptcy I wracked up over forty-five thousand dollars in credit card debt. Since then, we have managed to pay down over 40% of that debt. That hasn't been easy. We are now trying accelerate that payoff and hope to have 60% of that debt gone by the end of 2009. That means no new cars, very few new clothes, and a virtual halt to our home improvement projects. But so be it. Fortunately, we have been paying into our retirements (401(k) mutuals, mostly) without fail. Even though our current "paper loss" is at about 30%, we are now buying stocks through our mutual funds for dimes on the dollar. When the market bounces back, as inevitably will, those who had the guts to stick it out are going to see a dramatic increase in their portfolios, provided that their holdings are diverse and not solely tied up in businesses that are going to fail.

So, knowing all of this, I checked my credit report and I also talked to a friend of mine in the banking industy. My Experian Credit score is good. Not great. Nope, you don't get to know my exact credit score. It's better than it has been in five years. However, having said that, if I wanted to buy a house the mortgage company would expect me to put at least 15% down and that would not earn me their best interest rate. If I wanted that, I would have to put down 20%, and I would also be better off going with a 20 year loan, not a 30 year loan. So even though I have held the same job for five years, the days where I could finance 100% of the value of a house purchase are over. In my opinion, good riddance.

But, it does mean that even though banks and other financial institutions have more cash on hand than they've had in the last couple of years, they aren't lending because they've tightened their lending standards (which is good) for people asking for loans to buy everything from houses to cars to electronics.

So, getting back around to the original question: "Why isn't the rescue package working?" The answer: Its because lending institutions are not willing to go back to the bad practice of financing 100% of a purchase for people who cannot prove that they cannot pay back the loans they are asking for. We don't have a credit-liquidity problem. We have a credit-worthiness problem. And all the money in the Federal Treasury (is there any money left in the Federal Treasury?) will not solve that problem.