TALF;Of the terms announced, probably the most important are the new terms for student loans and automobile loans; credit card purchase terms will not be as important as might be expected.

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The new terms announced for TALF will help slow the descent, but will not reverse it. They are a genuine, but limited, step in the right direction. Of the terms announced, probably the most important are the new terms for student loans and automobile loans; credit card purchase terms will not be as important as might be expected.
Analysis
The Federal Reserve's new TALF program will support banks holding student, credit card and automobile loans, among other items. According to the Forbes story, the terms of the program amount to what is in essence borrowing from the Federal Reserve's discount window for banks (this may possibly be changed to other financial intermediaries) which have various items as collateral. The cost of the program is that the banks and other recipients will write down the value of the collateral (or the principal on the loans) by varying amounts. This loss in value is significant for the banks, but will be relatively small in its effects.

It is immediately tempting to think that the credit card provision will be most important. In fact, it will probably be the least important aspect. It is valuable to keep in mind the notion of price elasticity of demand. Before the recession began in earnest, terms for outstanding credit card loans were quite high, usually over 10%. The recession will bring this amount down, and has already done so, but the drop will be relatively small.

These arguments are supported by the Federal Reserve data. If we look at credit card debt outstanding and the rates involved, by checking
http://www.federalreserve.gov/releases/g19/current/g19.htm, we see the elements involved. Credit card plan rates, on "All accounts", have fallen from the 13.1% rate at the end of 2007. But this was a one-quarter, relatively speculative rate (there were similar and even higher rates earlier in the year, but a lot of volatility as well). Since the beginning of the year 2008, rates have fluctuated, about 50 basis points per quarter, but have been roughly about 12% in all quarters. The TALF program is unlikely to make significant differences in the rates for the upcoming quarters.

Similarly, this site shows that consumer credit outstanding has fallen between the 3rd and 4th quarters of 2008. But even so, the 2562.3 billion dollars outstanding for the 4th quarter of 2008 is higher than the level for the 4th quarter of 2007, and only slightly below the levels earlier in 2008.

The TALF program will affect automobile loans, but more as a "re-intermediation" effect than anything else. Anyone who listens on the radio knows that consumer credit from automobile company affiliates is already quite easy to come by. TALF provides an implicit signal that the Federal Reserve will stand by bank automobile loans, and will help write off bad loans by these institutions. So this will shift the relatively low levels of demand away from the automobile affiliates and towards the banks; given the low level of consumer confidence, it will not lead to a major renewal of demand for automobile loans, but will affect consumers right on the borderline of purchasing a car. If we examine Table 1.2.5, Gross Domestic Product by Major Type of Product, care of the U.S. Department of Commerce's Bureau of Economic Analysis, we will see that Motor Vehicle output has collapsed, from 387.1 billion dollars in 4th quarter 2007 to 255.7 billion in 4th quarter 2008. So it is natural for the Federal Reserve to try to rescue this, but the program by itself is too small to accomplish it: it doesn't affect enough consumer income to change consumer confidence levels.

The real effect, which is not appreciated, will be with student loans. It is not trivial to track these loans directly. The Department of Education is not geared up to reporting the quantity outstanding of the student loan aggregate by month or quarter, but instead assumes the only people interested in its offerings are those trying to obtain their own individual loans. The Federal Reserve does not report student loan data directly in its usual reports.

It is interesting to note, however, by checking http://www.federalreserve.gov/releases/h8/current/, that both the categories for "Other" under Consumer Loans and Security Loans have maintained relatively high levels throughout 2008. Part of these loans may encompass student loans. As the recession hits, a number of individuals will try to retrain, and we should expect to see educational institutions receive more applicants. This doesn't necessarily justify the school building expenditures that are in the stimulus package, but it does mean that the money that is going towards maintaining current school programs and facilities will have benefit. As this increasing demand hits the improved terms because of the TALF package, this is where the TALF package may have some real positive impact.
Contributed by a Member of the GLG Legal, Economic & Regulatory Affairs Councils