Millions of lost jobs might not make U.S. consumers feel like shopping for a new car or taking up more debt in the midst of a global pandemic.
But when, and if, American households are ready to start spending again on credit, the Federal Reserve plans to be there to help make it happen.
The Fed on Thursday said it would lend up to $2.3 trillion through a series of emergency facilities to help shore up the American economy, an expansion of its efforts announced last month, as the nation largely stays shut to contain the deadly coronavirus.
Among its alphabet soup of programs is a $100 billion nugget called the Term Asset-Backed Securities Loan Facility, of TALF 2.0, as it’s known on Wall Street.
It’s a revival of an old platform originally developed in the wake of the 2008-’09 global financial crisis to help thaw a frozen corner of finance where debt tied to credit cards, homes, autos, college education, commercial properties and even highly leveraged businesses ends up packaged into bond deals.
TALF doesn’t give households direct access to low-cost financing, but it makes it easier for big banks and companies like Ford Motor Co. F, +6.75%, American Express AXP, +2.97% and Harley-Davidson Inc. HOG, +12.09% to keep lending to their customers.
It works by making the AAA-rated portion, or safest part, of bond deals eligible for purchase by institutional investors through low-cost Fed loans. In theory, providing even a modest government backstop to start, will give investors confidence to snap up more debt, which in turn can keep credit flowing at favorable rates to borrowers.
The problem is that TALF can’t put families scrambling to pay bills back to work when swaths of the economy are closed. New York City’s Mayor Bill de Blasio said Thursday that the metropolis might face a shutdown into much of May.
”We believe the consumer is a key backbone to the U.S economy,” Ralph Saturne, senior research analyst at Income Research + Management in Boston, told MarketWatch. “However, with more Americans out of jobs, you do leave them exposed to being unable to pay rent, or buy groceries. This all has impacts to the broader markets.”
Michael Bright, the president of the asset-based securities trade group Structured Finance Association, called the Fed’s expansion of TALF on Thursday to include older commercial mortgage bonds sold without government backing and new collateralized loan obligations “incredibly important steps to further support credit flow to households and businesses,” in a statement.
But he also urged further action, including broader Fed support for the residential mortgage bond sector, as well as mortgage services inundated by a flood of calls from homeowners seek aid.
“The worst is not over,” said Stephen Smitley, head of structured products at Aware Asset Management in St. Paul, Minn., of fallout from COVID-19, the disease caused by the coronavirus.
“In 2008, it was a banking and housing crisis,” he said. “Now, the real economy is being impacted and it’s going up toward banking.”