Term Asset Backed Securities Loan Facility: Ready, Set, Debt!

The Fed will launch the Asset Backed Securities Loan Facility (TALF) to inspire US consumers to go into more debt, with the hopes of sparking life into the economy. MarketWatch reports:

A new lending program from the Federal Reserve and the U.S. Treasury could generate up to $1 trillion in loans for small businesses and consumers, the government announced Tuesday. The Term Asset-Backed Securities Loan Facility, or TALF, will provide its first loans March 25, the government said.

The New York Fed will lend up to $200 billion to owners of high-rated asset-backed securities, such as those backed by consumer loans, auto loans, student loans, credit-card receivables or small-business loans. Investors or companies holding these loans will be able to use them as collateral to obtain fresh funding from the government to extend credit to new customers worth up to $1 trillion.

The Fed’s program is designed to make a profit in the long run through interest and fees. The program will stimulate the economy by circumventing traditional credit channels that are now blocked up, the government said. With banks unable or unwilling to lend, even the most credit-worthy customers are finding credit hard to obtain.

To limit the credit risk to U.S. taxpayers, the TALF will require some private capital to back each loan. In each case, the borrowers will have to put up extra collateral, known as a “haircut.” The program could be expanded to cover securities backed by auto or equipment leases, or to commercial mortgages, residential mortgages or collateralized debt obligations

This sounds almost as exotic as the CDOs that preempted it. My reactions to reading this:

1. It’s another piece of nationalization. Banks are unwilling to lend, so the government circumvents them. When the government takes over the traditional function of an industry, that’s nationalization. TARP, TALF, and any other manifestations of government superseding industry are examples of policy that takes on characteristics of nationalization, but carefully avoids calling it by its name.

2. What is a high-rated asset-backed security?
As in, who is rating it, what assets are backing it, and does it have a one-word name?

3. The move is perfectly in line with Obama’s populism. The people taking on TALF debt will be the same people who are essentially being bailed out in the first place: People with credit issues, people on the brink of foreclosure, speculators, people whom the government perceives to be struggling. Such people are Obama’s salt of the earth. His new infrastructure campaign targets them, as do new foreclosure options–and TALF.

The problem is that people who have lived a conscientious financial lifestyle aren’t getting any help. The administration’s policies are alienating them. But in the bigger scheme of things, the administration can afford to alienate them. People on the brink of poverty are more likely to participate in social unrest. If the government meets their needs first, it is buying time: The rest of the population still has some distance to cover before it hits bottom.

In that sense, the policies could work, at least for a while. But at what economic cost?

  • Exactly. the banks aren’t lending because they SHOULDN’T be lending right now. In most cases anyway. Yes, credit is inordinately tight right now, but US is acting like this is some kind of sin. We’ve just gone through years of excessively loose lending. Let’s have some damn balance! But no, we have to fight this correction tooth and nail. And you’re absolutely right about it being another step toward nationalization. I don’t know how long it will stave off unrest though. Guns sales have already at least doubled in most areas. to me, that’s pretty telling. People may be poor, but they’re not stupid.