This week the U.S. government announced a new bailout measure, the “TALF”. Under the Term Asset-Backed Securities Loan Facility, announced Nov. 25, the Federal Reserve will extend up to $200 billion in non-recourse loans to holders of asset-backed securities (ABS) backed by consumer and small business loans in a bid to free up the ABS market. The Treasury Dept. said it will extend $20 billion in funds under the Troubled Asset Relief Program (TARP) to support the initiative. The TARP will support the TALF that will hopefully support the economy….
Also on Nov. 25 the Fed announced it will initiate a program to purchase up to $100 billion in the direct obligations of housing-related government-sponsored enterprises (GSEs) Fannie Mae, Freddie Mac, and the Federal Home Loan Banks and up to $500 billion in mortgage-backed securities (MBS) backed by Fannie Mae, Freddie Mac, and Ginnie Mae to ease the strains in the mortgage market.
I have another acronym to add to the mix, TTPU- “Time To Pay Up”. As the “all out effort” is unfolded, I am left to ponder what our economy will look like 2 to 5 years down the road. Like an otherwise healthy individual who suffers from a sudden, debilitating heart attack and survives, the economy will likely be subdued for some time. The major challenge that the Fed will face coming out of this downturn will be controling very high inflation, if not hyper inflation. When we begin to see daylight in the economy, and we will, the fed will have to suck liquidity out of the system quickly to avert this hyper inflationary scenario and that, in my estimation, will dampen any ambitious growth expectations.
The Treasury and the Fed’s answer to the crisis so far has been to print more money. That may very well be the only short term answer to this crisis and the only course of action that will ensure the survivability of our economy. My concern is how will we pay for this? Well, we have two choices. The first is to sell more debt to the world and mortgage our future to the Chinese. (some say we have done that already!). The second option is to tighten our belts as a nation. After extinguishing this great fire, we need to be sure we refill our water tanks…As Americans, we have to reinvent ourselves to reflect the changing global realities. We must find our way back to being a nation of innovation and production. The “Time To Pay Up” needs to come sooner rather than later.
