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?