Tuesday, March 3, 2009

How Clueless Is the Fed and Treasury?

Very. Here's more evidence that they don't understand the business cycle.

The Federal Reserve and Treasury have announced that a new securities loan program will start making $200 billion in loans beginning March 17. This is supposedly to "turn the economy around."

As collateral, the Term Asset-backed Securities Loan Facility [TALF] will accept triple-A rated asset-backed securities supported by new and recently originated auto loans, credit card loans, student loans and government-guaranteed small business loans.

Now, what is particularly clueless about this program is the inclusion of credit card loans in the program. As I have pointed out many times, a recession is the economy moving from a distorted consumption/savings ratio to another where consumption becomes a stronger part of the ratio. If you want to fight this move, something the Treasury and Fed want to do, and which BTW I think is a bad idea, but let's go with TFed thinking on this and try to force the economy back to the original distorted consumption/savings ratio, the last thing you want to do is pump more money into the consumption sector, i.e. the credit card sector. It is creating the opposite impact from what you want.

It's like fixing a leak in a sinking ship by adding water to the ship.

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