Posted by Marcelo Perez

Via MarketWatch:

WASHINGTON (MarketWatch) — A new lending program from the Federal Reserve and the U.S. Treasury could generate up to $1 trillion in loans for small businesses and consumers, the government announced Tuesday.

The Term Asset-Backed Securities Loan Facility, or TALF, will provide its first loans March 25, the government said. The Fed announced the program involving asset-backed securities, also known as ABS, in November, then unveiled an expansion last month, but the highly anticipated program was delayed.

How it works: The Fed will lend up to $200 billion to owners of “highly-rated” asset-backed securities, which include those backed by consumer loans, auto loans, student loans, credit-card receivables or small-business loans. The companies holding these loans will be able to use them as collateral to obtain new funding from the federal government. In theory, with the new funding, they would extend credit to consumers and businesses worth up to $1 trillion.

The program will stimulate the economy by circumventing traditional credit channels that are now blocked up, the government said. With banks unable or unwilling to lend, even the most credit-worthy customers are finding credit hard to obtain.

At first glance, this new Fed program to unclog the credit markets seems like a good deal, considering that it is designed to make a profit in the long run through interest and fees, and it provides assistance directly to Main Street, and not just Wall Street. Then you consider how we got here in the first place, by piling on the debt, and then you realize what this is all about; taking on extra debt. So the solution to the problem happens to be the problem. It doesn’t quite make sense, does it?

What we are witnessing now is the natural de-leveraging process that comes after an era of irrationality, greed, and over-exuberance. Compounding the problem just seems to be redundant and trivial, and gravely unnecessary. Let’s think of something new and fresh….or just let the markets do their work. Markets have always worked. Maybe its time to give them a shot.

Read the Full Federal Reserve Press Release.