Bernanke Defends TALF

I’ve had a couple posts up the last few days about two Fed presidents discomfort with the TALF. Specifically, Plosser and Lacker have said that the Treasury rather than the Fed should be dispensing money to various sectors of the economy.

Here from the WSJ Real Time Economics blog is a summary of Lacker’s position and Bernanke’s reply which he gave today before the Senate Finance Committee:

In a speech Monday, Lacker also said government programs targeting specific sectors of the credit markets may distort the allocation of capital in the private sector.

“Consequently, while some market segments benefit from reduced funding costs, others may actually see their costs rise as credit is diverted to those markets that have been targeted for support,” Lacker said.

He added, “an alternative approach to expanding the monetary base is to do it in a way that is more neutral across market segments.”

But Bernanke said Tuesday that liquidity isn’t the problem, and rejected the idea that officials may be in effect picking winners and losers. “The programs we’ve done are not credit allocation, because they’re very broad based,” Bernanke said.

Bernanke cited as examples the TALF, which accepts a wide range of collateral, and steps to improve the functioning of the overall mortgage market.

Actually, Bernanke only replied to the criticism that TALF was picking winners and losers. Both Lacker and Plosser also object to the program as an end run around Congress. They point out that the Fed is committing taxpayer money without Congressional authorization. I suspect that the reason that this side of the argument wasn’t discussed is that neither Bernanke nor the Congressmen want any part of it. Bernanke because he knows he can’t defend the position and the Congressmen because they’re perfectly happy not to have to justify this – as they constitutionally should – to the American public.

But let’s visit Bernenake’s contention that he is not picking winners and losers. Given that TALF is structured to purchase asset backed securities, it would seem that by definition larger lenders are going to be favored. Those in the position to originate and package loans of an economically viable size are going to be the natural users of the program. Smaller financial institutions are unlikely to be able to take advantage of the program. And, to the extent that the TALF buys these securities at subsidy sorts of rates, the potential for even further discrimination is enhanced.

We’re sure to see plenty of nasty unintended consequences from this program.

I rather suspect that Bernanke doesn’t disagree with Plosser and Lacker. He was caught in the panic earlier this year and took one for the team. That doesn’t mean that he shouldn’t be trying to move things back to a more lawful basis.

more: here (WSJ) and here (prior post)

Share

Related Posts

You can leave a response, or trackback from your own site.

Leave a Reply