The Fed: Financing For Everything

You knew that this was where we were headed. The NYT has a very good article that describes the manner in which politics is intruding on the Fed’s lending facilities particularly TALF.

The central bank is increasingly having to make politically sensitive choices. For example, it is weighing whether loans to people who buy speedboats and snowmobiles are as worthy of help as those to people who buy cars. And it is being besieged by arguments from R.V. manufacturers and strip-mall developers that they play a crucial role in the economy and also deserve help.

Many of the decisions could have political repercussions. On Feb. 9, President Obamatraveled to Elkhart, Ind., a Republican stronghold that Democrats hope to convert to their column. Elkhart is also home to much of the R.V. industry, which has been battered by the recession.

“When we talk about layoffs at companies like Monaco Coach and Keystone RV and Pilgrim International, we’re not just talking numbers,” Mr. Obama said, referring to three prominent R.V. companies. “We’re talking about people who’ve lost their livelihood and don’t know what will take its place.”

At the time, Fed and Treasury officials suggested that they would finance only car loans, credit card loans, student loans and Small Business Administration-guaranteed loans.

But the Recreational Vehicle Industry Association and Indiana lawmakers — among them, Representative Joseph Donnelly, a Democrat, and Representative Marc Souder, a Republican — were already lobbying the Fed to include loans for recreational vehicles on its list of eligible collateral that the Fed would accept.

They were not alone. Rental car companies were pushing the Fed to finance their fleets. Hertz, which is owned by two private equity firms — the Carlyle Group and Clayton, Dubilier & Rice — hired Mr. Eizenstat to make its case.

In trying to persuade the Fed to relax its loan terms, Mr. Eizenstat led delegations of Hertz officials to both the Treasury and the Fed. They reached out to Ron Bloom, the co-chairman of the Treasury Department’s auto task force, as well as to top aides to Mr. Geithner. They also made detailed financial presentations to Fed officials in Washington and New York.

While the Fed so far has denied Hertz’s requests to relax loan terms, some of the lobbying appears to have worked. In March, the Fed announced that it would purchase loans used to buy light trucks and recreational vehicles. It also said that it would finance equipment leasing deals, rental car fleets and “floor plan” loans, which car and R.V. dealers use to finance showroom vehicles.

On May 17, the Fed refined its rules even more, saying that “recreational vehicles” included not just motor homes and campers but also boats, motorcycles and snowmobiles.

The Fed is kidding itself if it thinks that it will simply be able to turn off this lending as the economy returns to normal. A line has been crossed. When the inevitable pain of trying to return to a market based allocation of credit becomes evident, the political pressure to continue the subsidies will be irresistible.

The political class continues to tell us that they do not want to run companies and that all of their measures are temporary. They aren’t and we all, I think, know that.

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