This article first appeared in the St. Louis Beacon, March 3, 2009 - The federal government’s new attack on the nation’s frozen credit markets has a difficult-to-understand name with an easy-to-understand price tag: $200 billion.
The program, dubbed the Term Asset-Backed Securities Loan Facility (TALF, for short), is a combined effort of the Treasury Department and the Federal Reserve that will provide $200 billion to investors to encourage lending to consumers and small businesses. And they’re moving quickly.
Requests must be made by March 17 for the first round of three-year loans; the Fed will start handing them out a week later. The program, which is to run until the end of this year, could spur up to $1 trillion in loans for business and households, according to a news release from the Fed.
Long Chen, an associate professor of finance at Washington University’s Olin School of Business, said the program is designed to help securitize the credit markets through the Fed’s purchase of asset-backed securities – consumer loans that have been packaged and sold to investors. Asset-backed securities account for about one-fourth of consumer loans.
“The problem is that during the current economic crisis, that market has dried up. So, investors are not using their new money to buy those loans anymore because of the worries over default. Nobody is willing to lend,” Chen said.
The program has been described as a “consumer bailout” because it is aimed at increasing the flow of credit into the hands of consumers, Chen said. Since October, the nation’s credit crunch has made it increasingly difficult for American consumers and small businesses to get financing – or they are being hit with high interest rates.
Using a car loan as an example, Chen explained the workings of the new TALF program:
“Somebody borrows money to buy a car. That car loan is packaged with others into an asset-backed security to be sold to an investor. The Fed is going to lend the market value of that asset-backed security to the investor but use the car loan as the collateral,” he said.
“Basically, it’s like insurance to the investors to make sure that if the underlying loans are bankrupt, the investors will not be hurt because the Fed is taking all the default loss if that happens. The investors don’t need to worry about it, they can turn around and buy more asset-backed securities.”
Fed Chairman Ben Bernanke told the Senate Budget Committee that the nation should see “immediate benefits” in student loans, credit cards, small businesses and consumer loans.
Chen said the program, though costly, is an important attempt to get credit flowing again – which is vital to the economy.
“Presumably, it’s a good thing. It helps to provide liquidity into the securitization of the consumer loans,” he said. “Then the investors can put the money back into this market, buy more of those asset-backed securities. Then those financial institutions – such as credit card companies – that get the money can turn around and lend more out.’’
Chen said the immediate concern is fixing the nation’s sick economy -- not the cost of the repair.
“This is a special period,” he said. “Basically, if you do not stimulate the economy, you will get this long recession-depression. Some historians even claim that in the New Deal period [during the Great Depression] the government didn’t spend enough money, which is why the recession lingered until the second world war. The point here is that you forget about the budget deficit. You just pump in more money and you get out of the recession. And, historically, it seems to be the case that if you get out of the recession you can pay down the debt relatively quick. Otherwise, it could be more costly.”
