Tuesday, November 25, 2008

A New Federal Reserve Program: This Time for Consumers

Today, the Federal Reserve also announced the Term Asset-Backed Securities Loan Facility (TALF), another program in the line of snappy acronyms. The Fed intends the TALF to help market participants to 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). The aim here is that if the Fed buys up some new and recently issued ABS, then lenders will turn around and relend the money to consumers who desire a student loan or a new car. Now, this program probably won't get really going to perhaps February, so consumers should not be expecting credit markets for consumer loans to ease in the immediate future. That said, some program for consumer credit is needed. But, is this the right one?

As a law professor, I can say that I want students to be able to get their student loans without too much hassle. Although I am not a big fan of excessive consumer debt, there is a need for credit to be available. The Fed's TALF program in its announced form is a continuation of the ABSs that have helped us to arrive at the financial crisis that we are in now. Some time ago, Alan Greenspan mentioned the problems arising from lenders incorrectly pricing ABS when they retain no stake in the ABS after sale. Basically, the risk models are prone to error in these cases. Though we don't have the details of the TALF program, I don't see any indication that the Fed is tackling this problem. This means that the risk problems inherent in our current financial crisis from securitization may remain with the TALF program as well.

So, for the next few months while credit remains tight, perhaps Americans will pay down those credit cards. Adding new credit come February when the Fed's TALF takes hold? Perhaps, but let's think carefully about it.


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