GMAC: Loosening credit standards in the teeth of recession
It may sound counter-intuitive to loosen credit standards when we are on the cusp of major job losses and bankruptcies. But, this is exactly what the newly minted bank GMAC is going to do with its free money from the TARP (Troubled Asset Relief Program).
GMAC and General Motors moved quickly on Tuesday to capitalise on the US government’s bail-out of GMAC, the Detroit carmaker’s financing arm.
GMAC said it would immediately loosen its criteria for vehicle loans, providing financing for car buyers with a score of 621 or more on the Fico scale, a widely used measure of Americans’ creditworthiness.
Two months ago, as it was squeezed out of capital markets, GMAC limited financing to buyers with scores of 700 or more, with a maximum of 850.
GM launched low-interest and interest-free financing offers on many vehicles for the first time in more than three months. Mark LaNeve, GM’s North American marketing chief, said the decision signalled “that GMAC and the GM dealer are back in the game”.
I have no problem in principle with making loans to customers with good credit. However, this smacks of loose lending induced by free money. If I were an Austrian economist I would say this is exactly why trying to prevent the downturn only lengthens and deepens it. If I were an Austrian economist I would say this is a subsidy to a zombie company so that it can lend recklessly with taxpayer monies.
But, alas, I have been promoting economic stimulus as a necessary evil. Apparently, these are the evils that are likely to result. Is GMAC lending to customers who should get loans?
GMAC to loosen criteria for loans upon bail-out – FT