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« Clinton Strikes Back at Israel | Main | The State Backs Loans »

Because It's Worked So Well In The Past

This, from tomorrow's Wall Street Journal:

The program is the Term Asset-Backed Securities Loan Facility, or TALF, in which investors are given low-cost loans from the Fed and in turn use the money to buy securities backed by consumer debt. The loans in this program are three-year loans and so far have been aimed at car debt, credit-card debt and other consumer loans. The Fed is preparing to announce new loans with five-year terms to better match the needs of investors in commercial-mortgage-backed securities, an effort to boost that sector.

Officials have been reluctant to make such long-term loans, for fear five-year commitments could hamper the central bank's ability to withdraw money from the financial system down the road. They have been looking to design the expansion so the loans are less appealing in later years.

...

The $700 billion CMBS market has rallied in the past month on hopes TALF would be used to restart the market. Yields on triple-A CMBS bonds have fallen to about 10% from 12%, according to Trepp, which tracks commercial-property debt markets.

Bringing down the yields on existing debt is critical to spark new lending because, as long as investors can buy top-rated CMBS that yield as much as junk bonds, it would be unprofitable for banks to make new loans. That is because they would have to offer higher yields to attract investors, wiping out their profits.


How is this wrong?  Let us count the ways.

  1. The government is actively encouraging debt-backed securities in real estate
  2. This worked so well before that it now finds itself in partnership with the UAW, with Chrysler declaring Chapter 11.
  3. The credit card experiment was so successful in bringing down card rates that Obama called in the credit card companies to explain to them a) who's in charge now, and b) their rates are too high
  4. Just because you artificially lower rates by creating demand doesn't mean the investments are any better
  5. It's inflationary, because it puts money into the system that the Fed can't get out quickly
  6. They want to limit the benefit in the out-years, making the whole project less attractive to speculators investors
The last paragraph doesn't make any sense to me.  First of all, it's only true if the banks can only make money re-selling the debt.  How about, you know, collecting the interest on the original loans?  Secondly, if the investors would already rather buy CBMS debt than junk bonds, the rate should already be lower.

In fact, bringing down the yields is critical to spark new lending because the borrowers can't afford the rates the banks want to charge.

You know, kind of like how some people couldn't afford mortgages.

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  booklist

Power, Faith, and Fantasy


Six Days of War


An Army of Davids


Learning to Read Midrash


Size Matters


Deals From Hell


A War Like No Other


Winning


A Civil War


Supreme Command


The (Mis)Behavior of Markets


The Wisdom of Crowds


Inventing Money


When Genius Failed


Blink: The Power of Thinking Without Thinking


Back in Action : An American Soldier's Story of Courage, Faith and Fortitude


How Would You Move Mt. Fuji?


Good to Great


Built to Last


Financial Fine Print


The Day the Universe Changed


Blog


The Multiple Identities of the Middle-East


The Case for Democracy


A Better War: The Unexamined Victories and Final Tragedy of America's Last Years in Vietnam


The Italians


Zakhor: Jewish History and Jewish Memory


Beyond the Verse: Talmudic Readings and Lectures


Reading Levinas/Reading Talmud