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Jon Talton

Analysis and commentary on economic news, trends and issues, with an emphasis on Seattle and the Northwest.

March 3, 2009 at 10:33 AM

They call it TALF. But will it finally unfreeze lending to consumers and small business?

Top of the News: You’ve heard of TARP, part of the government’s bailout of the banking system, but I’m sorry to report that there is no Bad Asset Recovery Fund (BARF) — if you don’t laugh in a historic downturn, you can only cry. Now we have TALF, and it’s real. The Term Asset-Backed Securities Loan Facility (that spells TABSLF to me, but I went to public schools). In any event, TALF is intended to unlock loans for small business, autos and credit cards. You can read the government’s explanation of the plan here, but be prepared for your head to explode.

The hope behind TALF is to finally restart the credit markets that started seizing up in the fall, and benefit small businesses and consumers that complain the bailed-out banks still won’t lend. A reported $1.9 trillion in lending capacity has been frozen out — about half of all lending in 2007. Under TAFL, officials hope to generate as much as $1 trillion in new lending.

Here’s the catch: Government money and loan backing aren’t going to the corner hardware store, or even the banks. They will go to the shadow banking system, the largely unregulated world of hedge funds and private equity that is the so-called “banker to the banks.” Those of us of a certain age remember when banks made loans, held them, and profited from the interest (borrow at 3 percent, lend at 6 percent, be on the golf course by 3 p.m.). Oh, how things changed over the past 10 years.

In recent years, the banks have bundled loans into securities, from plain vanilla to those “exotic” derivatives, and sold them to the shadow banking system. It all worked splendidly as long as the bubble kept inflating. TALF, or so the logic goes, will make low-cost loans to purchasers of AAA-rated securities backed by new credit-card, student, auto and Small Business Administration-backed loans. If it works, it will re-start the loan securitization machine. The downsides and unknowns are many. For example, labor markets and household wealth have taken such hits, that many people and small businesses might not qualify at banks trying to bundle AAA packages of loans. And TALF leaves unresolved the danger of a hidden banking system that arguably helped cause, worsen and transmit the current unpleasantness.

The Back Story: My colleague Melissa Allison reports that Starbucks CEO Howard Schultz says there will be no more layoffs at the Seattle-based giant (be sure to check out her new Coffee City blog here). To quote from the movie True Grit: “That’s mighty brave talk for a one-eyed fat man.”

Schultz may well be the John Wayne in this gunfight between Starbucks and the gang including McDonald’s and the recession. But I’d love to know what’s being said inside the executive suites. Even with draconian cuts last year, Starbucks may not be prepared for the sheer velocity of the meltdown of recent months — or for future shocks to the economy. It was already trying to turn the page — whether it admitted it or not — from a sweet young growth stock to a mature company that could still be a world beater. I’m not trying to grind Starbucks here. But the reality for every company now will be: How does it respond to the shocks to come. All the expert reassurances have been wrong. So forget that. More shocks to come. The same moves that will allow the survivors to roll with the punches, will let them pioneer the next wave up. It won’t be another bubble, but it will be up. And it will come.

Today’s Econ Haiku:

Ben’s too straight-forward

Compared to Greenspan’s Yoda

Good. Tell us straight up.

Comments | More in Banking, Consumer spending


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