Fed Taking New Collateral From Banks

There are a three things that are disturbing about yesterday’s announcement that the Federal Reserve Bank’s new Term Securities Lending Facility will begin taking student loans, car loans, home equity loans, and credit card debt as collateral (in addition to the sub-prime mortgage debt they’ve been taking since the Bear Stearns meltdown).

1) This indicates to me that the credit crunch has spread to the derivative products based on these type of loans and that because of this banks are faced with additional liquidity issues. Scary.

2) The Fed – meaning you and me – will now be on the hook for this potentially bad debt should any borrowers default. This is the moral hazard writ large; another government bailout.

3) The announcement was made just before the bigger story on unemployment figures was released yesterday, and on a Friday, ostensibly to protect against a torrent of unflattering press.

What does this tell you about Wall Street’s rebound? And the Fed’s take on the risks to our economy?


One Response to Fed Taking New Collateral From Banks

  1. Mark T. Market says:

    Nassim Taleb spoke out in Davos about banks and the moral hazard of bailouts.

    He and Nouriel Roubini were both interviewed at CNBC recently, but soundbite journalists are incapable of handling their views sadly.

    Zimbabwe citizens know very well what kinds of horrors hyperinflation can bring, but this kind of phenomenon is considered remote from occuring elsewhere.

    Glenn Beck’s hockey stick makes me think again.

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