Let’s see, Bloomberg said yesterday that the Federal government had committed $7.4 trillion to lending facilities and guarantees. The total is now $8.2 trillion thanks to new programs announced today to aid borrowing by consumers, small businesses, and homeowners.
Stocks have rallied, and the 30 year bond is also up three points, due to a GDP report that revised third quarter growth from positive 0.3% to negative 0.5%. We had been skeptical of the GDP release figures at the time. Note that October was worse than September, but retailers have said there is a slight improvement in the last couple of weeks from the sales levels they had seen earlier.
From the Fed’s press release:
Purchases of up to $100 billion in GSE direct obligations under the program will be conducted with the Federal Reserve’s primary dealers through a series of competitive auctions and will begin next week. Purchases of up to $500 billion in MBS will be conducted by asset managers selected via a competitive process with a goal of beginning these purchases before year-end. Purchases of both direct obligations and MBS are expected to take place over several quarters. Further information regarding the operational details of this program will be provided after consultation with market participants.
From a separate press release:
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.
Some fine print from an attachment:
Eligible collateral will include U.S. dollar-denominated cash (that is, not synthetic)
ABS that have a long-term credit rating in the highest investment-grade rating category (for example, AAA) from two or more major nationally recognized statistical rating organizations (NRSROs) and do not have a long-term credit rating of below the highest investment-grade rating category from a major NRSRO.
All or substantially all of the credit exposures underlying eligible ABS must be newly or recently originated exposures to U.S.-domiciled obligors. The underlying credit exposures of eligible ABS initially must be auto loans, student loans, credit card loans, or small business loans guaranteed by the U.S. Small Business Administration. The set of permissible underlying credit exposures of eligible ABS may be expanded later to include commercial mortgage-backed securities, non-Agency residential mortgage backed securities, or other asset classes. The underlying credit exposures must not include exposures that are themselves cash or synthetic ABS.
Originators of the credit exposures underlying eligible ABS (or, in the case of SBA guaranteed loans, the ABS sponsor) must have agreed to comply with, or already be subject to, the executive compensation requirements in section 111(b) of the Emergency Economic Stabilization Act of 2008.
As we said in a post last evening on this program:
There are a few problems with this approach:
1. The banks have already been given support right, left and center. They are still not lending,
2. Some of the stinginess is warranted. Um, a credit bubble means a lot of people got loans who shouldn’t have. Do we want banks again to make unsound loans? I should hope not, but I could be wrong here. A fair bit of consumer credit ought to contract. And even if a lot of good customers also have their credit lines cut, do you really think the banks are going to turn around and reverse these decisions on a meaningful scale. Ain’t happening.
3. Consumers are scared about employment and the loss of their home equity piggybank. They also know they borrowed too much. They want to lower debt levels. So as a reader put it, “Even if you throw the horse in the lake, you can’t make him drink.”
4. Banks are so desperate to restore profits that they are jacking up prices on existing consumer credit, even as the Fed and Treasury have been provided lots of low-cost support. Citibank and American Express are raising interest rates on existing loan balances for a a significant proportion of customers, and they no doubt have company. If consumers face higher charges on their outstanding debt. it considerably reduces the odds that they can or will take on more debt.
And a separate issue: consumer debt and consumer spending were at unsustainable levels. They need to fall. Trying to shore up consumers is a wrongheaded way to stimulate the economy. Fiscal expenditures, including a broadening of safety nets, is a much better way to go.
Persisting in a failed course of action is not a sign of intelligence.