Tuesday, November 25, 2008

TALF Blows a Bigger Bubble, Keeps Markets from Clearing

The Fed created a new lending facility to promote consumer loans by supporting the ABS market. The announcement says:

The Federal Reserve Board on Tuesday announced the creation of the Term Asset-Backed Securities Loan Facility (TALF), a facility that will help market participants meet the credit needs of households and small businesses by supporting the issuance of asset-backed securities (ABS) collateralized by student loans, auto loans, credit card loans, and loans guaranteed by the Small Business Administration (SBA).
Under the TALF, the Federal Reserve Bank of New York (FRBNY) will lend up to $200 billion on a non-recourse basis to holders of certain AAA-rated ABS backed by newly and recently originated consumer and small business loans. The FRBNY will lend an amount equal to the market value of the ABS less a haircut and will be secured at all times by the ABS. The U.S. Treasury Department--under the Troubled Assets Relief Program (TARP) of the Emergency Economic Stabilization Act of 2008--will provide $20 billion of credit protection to the FRBNY in connection with the TALF.

More details accompany the announcement, but the impact is clear: The TALF will sustain the consumer credit bubble and blow a bigger bubble, which will pop later and cause even greater pain. The consumer debt load is already too high for many, and there is already too much bad paper in the ABS market. How does the TALF help solve the problem?

If markets were allowed to clear, we would get out of this mess more quickly and resume a path of positive economic growth.


Press Release, November 25, 2008
Board of Governors of the Federal Reserve System