Fed extends consumer lending program through March

The Fed sent a strong signal on August 17th when they extended the Term-Asset-Backed-Loan-Facility (TALF) that the financial markets continue to be hampered by investors unwillingness to buy loans backed by student loans, auto loans and credit cards. Traditionally these type of loans were some of the safest and most liquid. With the fallout in the economy last September and the corresponding jump in defaults on credit cards and other asset backed loans, investors have shied away from these types of loans labeling them just too risky. Without a liquid market for asset back loans, consumers and small businesses cannot borrow the money they need. To offset the risk and spur investment, the Fed instituted TALF last December. The program which was intended to go from March through December 2009 has grown to over $36 billion and is now been extended through March 2010.

Until investors feel confident that market dynamics have been righted to the point that they can begin to accurately price debt instruments including asset backed loans, the financial crisis will persist. In the meantime, programs like TARP and TALF are artificially propping up the financial markets, but at what price? The Fed now holds $2 trillion dollars of debt in its efforts to drive the economy out of recession. This balance has more than doubled since last year causing some to question the Obama administration's economic policies and whether the United States might lose its AAA rating. A drop in rating would severely weaken the dollar and put a strain on the US government's ability to borrow money, especially if foreign governments lose their faith in America.

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For me personally, I am glad the US government has instituted TARP and TALF. For without these programs, hundreds of banks which are borrowing billions from the government every day would have failed bringing the financial markets to their knees. Instead of talking about “green shoots” we would be talking about the Great Depression of 2009. While we are far from out of the woods, we must begin to consider the consequence of the debt the government has accumulated and the inflation that will come when the economy finally rebounds. I hope Bernanke and his team stand ready again to take action.

Pete Canalichio
August 24, 2009