"Down under", high profile household stimulus packages have tended be to in the form of relaxed government fiscal policy (spending), such as the tax cuts rolled out in New Zealand or the two discrete payments made by the Australian government to its eligible citizens late last year and early this year.
Further afield, a key goal of the US government initiatives has been the restoration of consumer credit. In fact George Bush lobbied for his stimulus and support packages on the basis that Wall Street problems would domino into Main Street. He argued that if traditional providers, banks and other lenders choked off credit, how could ordinary citizens arrange finance to buy a car, send their children to university, use their credit cards, or buy houses? And what of small businesses? Would they be able to pay their staff, change premises (commercial property) or add and replace essential office equipment (via leases)?
Traditionally, a major source of finance for these consumer receivables was via bonds known as asset backed securities (ABS). The consumer is given a loan to purchase goods (a car) or services (education) and in return the lender demands interest and principal, ultimately enforceable by direct recourse to the asset or borrower or both. The loan is then combined with many other similar loans and repackaged into a single tradeable security. In the first half of 2008, issuance of new ABS averaged around US$ 19 billion per month, collapsing to less than US$ 1 billion in November, immediately post the failure of Lehman Brothers.
Enter then the New York Federal Reserve (Fed), empowered by the Term Asset-Backed Facility (TALF). Under this programme the Fed sourced cheap money which it lent to private investors, who combined this official liquidity with a substantially smaller portion of private equity, in order to purchase a wide range of authorised consumer receivables or ABS.
The TALF was worked well. With its support, May's average ABS issuance reverted to close to US$ 14 billion. Support from Uncle Sam is providing an important component to assist consumers and households to rebuild one component of economic activity.
Read the full TOWER June 2009 Portfolio here.