WASHINGTON, DC-This morning Treasury Secretary Henry Paulson gave an update on the agency’s activities of the last several weeks, explaining the thinking behind certain actions–such as the decision to bailout AIG, again–and how those decisions fit in the context of plans for the near term. Sandwiched between this recap of recent events and the future direction of the bailout strategy, was this bombshell for the real estate capital markets: The Treasury Department has decided that purchasing illiquid mortgage-related assets “is that this is not the most effective way to use TARP [Troubled Asset Relief Program] funds.” Instead, the Treasury “will continue to examine whether targeted forms of asset purchase can play a useful role, relative to other potential uses of TARP resources, in helping to strengthen our financial system and support lending.”

Essentially, the government-supported recovery has shifted away from real estate capital markets to consumer liquidity; based on these comments it appears that, for the most part, the remaining TARP funds will be dedicated to freeing up money for credit card financing and auto loans. Additional measures–including a new liquidity facility for these loans–are also under consideration.

The financial system has stabilized, Paulson explained. At the same time, “the important markets for securitizing credit outside of the banking system also need support. Approximately 40% of US consumer credit is provided through securitization of credit card receivables, auto loans and student loans and similar products. This market, which is vital for lending and growth, has for all practical purposes ground to a halt.”

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