The Federal Reserve Act confines the System's outright asset purchases to securities issued or guaranteed by the U.S. Treasury or U.S. agencies. Even so, the Fed has the potential to use its balance sheet to restore functioning in other impaired financial markets. The recently announced Term Asset-Backed Securities Loan Facility (TALF) provides a model for doing so. This new Fed facility is designed to spur lending to meet the credit needs of households and small businesses. The facility will support the issuance of securities collateralized by auto, student, credit card, and Small Business Administration (SBA) loans—sectors where the issuance of new securities has slowed to a trickle. The high borrowing spreads on such securities, even when the underlying loans are government-guaranteed—as in the case of SBA and many student loans—suggest not only heightened credit risk but also an impairment of market liquidity which the facilities can address. The inability of financial institutions to securitize such loans, and of potential investors in such securities to borrow against them on reasonable terms, reflects an important breakdown in credit markets. By improving the functioning of markets for securitized assets, the Fed has the potential to boost private-sector credit flows in support of the economy. Under the TALF, which is a joint Federal Reserve-Treasury initiative, the Fed has agreed to provide nonrecourse loans to holders of eligible highly rated asset-backed securities. Cooperation with the Treasury is necessary because the program entails some risk of loss and, under the Federal Reserve Act, all Fed lending must be appropriately secured. The Treasury has committed $20 billion of TARP funds to protect the Fed against losses on the Fed's lending commitment of up to $200 billion.