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TALF: To Serve Man

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Holy moly, it's a cookbook!

The zombie apocalypse may threaten to eat our economy, but the continuing drive to serve man (or rather, prop up consumer spending) may simply plunge us deeper into an unsustainable economic black hole. I fear we're about to get cooked by some of the newer ideas about how to get the economy moving again, including the Fed's newly launched tool, the TALF.

(Somehow, I'm going to relate all this to sci-fi movie lore. Grab your tinfoil hat and bear with me.)

In space, no one can hear you scream
TALF --  not to be confused with the old TV show ALF -- is short for Term Asset-Backed Securities Loan Facility. Or so they claim. (Isn't there supposed to be an "s" in that acronym, then? Maybe even a "b," too?)

The TALF reminds me of that classic Twilight Zone episode, in which everyone's so enamored of some extraterrestrials' good works for the human race, until the humans realize that the aliens' book To Serve Man is actually -- gasp! -- a cookbook!

Conveniently enough for my strange metaphor, the TALF is meant to serve the consumer (and the economy). Through this Federal Reserve program, the Fed will lend $200 billion to owners of consumer debt-related securities. That should supposedly ease lending, since loans can be more readily repackaged as securities. Even if there are no markets for the securities, owners can cash out through the TALF program instead. The Fed claims this could generate as much as a $1 trillion increase in lending to households and small businesses.

That should be good for beleaguered consumers and small businesses smack dab out of resources, right? And it's theoretically good for our downward spiraling economy, too. After all, consumer spending accounts for approximately 70% of our GDP, and consumers' severe spending cutbacks contibute heavily to our sharply contracting economy.

On the surface, the plan sounds all well and good, if it works. But if you believe that American consumers spent the last decade or so gorging themselves on too much debt, leaving many just plain overleveraged, you might wonder whether the TALF sounds a little too much like the reasons why we got trouble to begin with. Now that's scary.

E.T. phone home -- need money fast
Our most recent economic boom depended heavily on convincing consumers to buy things they couldn't actually afford. From ARM and interest-only home loans to six- or seven-year auto loans to burgeoning credit card debt, consumers were encouraged to spend, spend, spend. There may be some things money can't buy, and for everything else, there's MasterCard (NYSE: MA  ) and Visa (NYSE: V  ) . But beyond the cheery slogans lies the grim reality that consumer borrowing got well out of hand.

Last October, I saw staggering data about debt among U.S. consumers. Did you know that the average household owed $110,000 in mortgage and other debt, and was only saving a measly $400 a year? I also read that Americans owe $2.5 trillion in credit card, auto, and other loans. This sky-high consumer debt is one of the dirty little secrets of the financial crisis.

It's clear that the worsening economy is only further pressuring already strained consumers. American Express (NYSE: AXP  ) recently made news by offering to pay some customers $300 if they paid their balances in full. Meanwhile, card issuers like American Express, Citigroup (NYSE: C  ) , and JPMorgan Chase (NYSE: JPM  ) are cutting customers' credit limits to ward against charge-offs and delinquencies. Indeed, credit card issuers have seen charge-off rates increase dramatically over the last year.

As ugly as that may be, aren't we simply facing up to a natural correction in the wake of consumers' unsustainable debt? Many consumers' credit far outpaced their actual incomes; the ability to use their houses as ATMs via home equity loans only further distorted the reality of consumers' true buying power.If the banks are pinching pennies and tightening their belts, they might actually signal a return to some semblance of sanity, even if they're grinding our previous economic "growth" to a halt.

Everybody in this family needs to just calm down and eat some fruit or something
Science fiction is full of deceptively harmless creatures that eventually run amok. Trying to spark economic growth through easy credit, or trying to "help" people to continue to indebt themselves instead of tightening lax lending standards, may not have the box office appeal of a good death ray attack or gremlin rampage, but it's no less dangerous.

Do not be alarmed, Earthlings! Calm down and eat some fruit! Or, better yet, some pricey meals at Ruth's Chris (NYSE: RUTH  ) , or some diamonds from Tiffany (NYSE: TIF  ) or something. All is well -- you can borrow again! 

Our economy needs to correct its previous disconnect from reality, and these plans just won't do that. A healthy economy serves us. In an unhealthy one, fixated on easy credit and other unnatural growth drivers, we're the ones getting served. We've been invaded by debt, and To Serve Consumers -- shock, horror! -- is a cookbook.

JPMorgan Chase is a Motley Fool Income Investor selection. American Express is a Motley Fool Inside Value pick. The Fool owns shares of American Express. Try any of our Foolish newsletters today, free for 30 days.

Alyce Lomax does not own shares of any of the companies mentioned. The Fool's disclosure policy is so simple, even Gordon Shumway would get it.

Read/Post Comments (8) | Recommend This Article (22)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 04, 2009, at 2:13 PM, XMFSinchiruna wrote:

    Shock, horror! I think the numbers are morphing into shock and awe! Fantastic article!

    Cookbooks; cooking books ... these are core competencies for policymakers when they extend their tentacles over the markets.

    The very fact that we are referred to as consumers should tip some people off as to the prevailing mindset.

    Thanks for yet another great one!

  • Report this Comment On March 04, 2009, at 4:03 PM, ByrneShill wrote:

    Marry me Alice!

  • Report this Comment On March 04, 2009, at 6:26 PM, bellabo wrote:

    Thats the reason I love sales. No ressions, just plenty of americans to sell things to that thay really dont need. God bless America.

  • Report this Comment On March 04, 2009, at 6:57 PM, xetn wrote:

    This is the first article I have read on Motley, that actually has credence. How on earth does the great Obama government think that the only way to cure the economic woes of the the US is to make credit easily obtainable to consumers so they spend, spend spend and thus create jobs. Even if credit is easy to obtain, how many consumers can actually afford to make payments on new credit? As stated in the article, it is governments easy and cheap credit that is responsible for the problem in the first place. It seems to me that the best thing government can do to restore the health of the economy is NOTHING!

  • Report this Comment On March 04, 2009, at 9:11 PM, afterthefire wrote: stikes me that because millions of people overspent doesn't mean that creditworthy people should be strikes me that the pendulum has begun to swing to far the other that people perfectly capable of paying for cars or appliances are not gaining access to itself didn,t suddenly become a terrible thing..I mean,what would short sellers do without it?

  • Report this Comment On March 04, 2009, at 10:03 PM, glongcih wrote:

    I am a credit worthy individual, (FICO 800) or at least I thought so. I had been using a credit card from a well know company for about 3 years. Even though the interest rate was only 10% I paid off my balance every month. Last month the card company sent me a form letter indicating that because of the length of time I had the card and current difficult economic conditions they were retroactively raising my interest rate to 17%.

    When I called the customer service line about the change, the polite young woman could not understand why I was angry. She said. "You pay off your card every month so this won't affect you." My response was "If this is how you treat your customers who pay their bills, how do treat the ones who don't" and "your company is run by idiots.

    In summary I want to know, why am I getting gouged for someone else's largess?

  • Report this Comment On March 05, 2009, at 6:29 AM, 7footmoose wrote:

    Has everyone forgotten that excess consumer debt is what has gotten this country into the financial mess we are in? No need to remind me that the morons in the Congress and the Senate are among those who do not understand this.

  • Report this Comment On March 19, 2009, at 11:29 AM, FleaBagger wrote:

    Wasn't it Outer Limits?

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