More Fed action - the leverer of last resort

The Fed and Treasury announced another new lending program that will reach $800 billion. The new program will be include $600 billion of purchase of debt issued by the housing GSE's. The second part will be $200 billion of lending to support consumer and small business loans through the Term Asset-Backed Securities Loan Facility. The Treasury will provide $20 billion of credit protection on the lending facility. This would represent 10% of the total lending pool. The Fed is using its special power to lend directly in consumer market.

This is an interesting set of new policies. The $600 billion for GSE is a statement that the housing market cannot support or will not support the purchase of these bonds. The Fed has to step in the the GSE's go without funding. Credit has to be rationed because there is not a price that will make this work. The $200 billion to consumers tells us that banks are not willing to make the loan from their own balance sheet. For all of the work the Fed has done to date for banks, they will still not lend money.

There is an interesting paradox of delevering. To get the private market to delever but not cause a panic, there has to be more leveraging of the public balance sheet through the Fed and the Treasury. Right now o keep the economy afloat we have to substitute public for private lending. We have to socialize credit risk. The credit risk of the economy has to be spread across taxpayers in an effort to support the economy. The choice is not being made by the investor but by the government.