Don’t Forget about the TALF!
Does anyone remember, during the last financial crisis, the “evil bankers” who almost collapsed the entire financial system? Then, in order to save the world, the Fed provided loans and bailouts to those same bankers?
Considering the relatively “small size” of the TALF (Term Asset-Backed Securities Loan Facility) and how most living on main street are not in the business of granting loans, it didn’t garner much attention when the updated TALF term sheet was announced this week. Still, after looking further into the program some may discover, or remember, TALF is not new. It was implemented during the Great Recession over a decade ago. During that time, Matt Taibbi wrote an article in Rolling Stone called The Real Housewives of Wall Street which discussed the original TALF program. Per the article, the wife of then Chairman of Morgan Stanley and the widow of another high-ranking Morgan Stanley employee started a company with close to $15 million, borrowing nine loans for $220 million under the TALF. With these low-interest loans they bought student loans and commercial mortgages. At the time of writing, he noted roughly $150 million had yet to be paid back to the Fed. The public didn’t know how much money the borrowers earned from their dealings, as there was no accountability. But the loans were structured such that 100% of the gains would go to the recipients while 90% of the losses would go to the treasury. Understanding the article was written in an entertainment magazine, and not with Austrian economics in mind, he did capture a very important detail:
Given out as part of a bailout program ostensibly designed to help ordinary people by kick-starting consumer lending, the deals were a classic heads-I-win, tails-you-lose investment.
Without comparing the previous TALF to the current, and assuming control issues have been ameliorated by the Fed, the underlying problem with these programs remains the same. They all require money be created then lent to certain members of society for the supposed purpose of saving society in time of need. If the loans are successful, the gains go to the borrower. When the loans are not repaid or forgiven, the newly created money and its accompanying debt will exist as a cost to be paid by future generations. To the masses, these loans seem palpable when the borrower is not considered “rich.” However, the problem persists regardless of the borrower’s income bracket.
The new TALF follows the same Special Purpose Vehicle (SPV) and US Government equity stake to which we’ve now become accustomed. Under the program, the treasury is only making an initial $10 billion equity investment with a maximum lending limit, thus far of only $100 billion. Eligible borrowers can make loans to the public, then use those loans as collateral to borrow from the SPV. In this program, eligible loans include: auto and student loans, credit card receivables, equipment and floorplan loans, leveraged loans, and commercial mortgages to name a few. Even though the TALF may be smaller than the other Fed programs, the anti-capitalist nature and prior history warrants attention.
The day after the updated term sheet was announced, Chairman Powell gave a speech where he stated:
At the Fed, we will continue to use our tools to their fullest until the crisis has passed and the economic recovery is well under way.
At the week’s end, the Fed’s balance sheet hit a record $6.9 Trillion. With many programs still yet to open, central bankers remain convinced their inflationary tools and ability to judge who needs money most far outweighs the life, liberty and happiness of the many. The programs may be larger, but the narrative and risk to the public remains the same.