Instead of the Troubled Asset Relief Program, we should establish the Throw Rocks At Politicians foundation for their great idea of giving the Treasury $700 billion and not establishing some kind of guidelines on how it must be used. Previously, I stated that if this program must exist, then Secretary Hank “The Bank” Paulson does need free roam to send the money where he thinks it would be best served. But Congress passed a bill granting these funds and didn’t even require that Paulson make whoever receives this money actually use the money!
In Britain, a bailout of sorts was passed and strict requirements were given that the loans the banks receive must be used to issue new loans to the people and businesses. Not here though. Oh but thankfully we established an oversight panel to give Paulson a report card. Did that clown from high school care about his report card? No, and neither does Paulson.
In the United States we have this unwritten philosophy that we don’t have to do what we’re told unless we go to jail for it, and that doesn’t stop everyone. The oversight committee is about to release it’s first report on the progress of the TARP. I think this quote from the report best sums it up:
“Preserving homeownership is an explicit purpose of this Act,”
“Explicit” is only a fancy word for “implied” here. I’m thoroughly convinced that a successful democracy requires a certain level of incompetence from our elected officials. The report goes on to question the Treasury for buying equity in banks instead of buying up bad loans, the initial goal.
The Treasury could counter by citing their plan to work with the FDIC to buy up bad loans, but the report calls them out on that as well.
So what are the banks doing with all that money? It’s called stabilization. Everyone is sitting around waiting for something else to go wrong. They don’t want to be caught with their pants down again like last year. When all the loans started going bad last year, no one had the cash to back them up, this is why so many failed. The ones that survived still can’t sell their bad loans, so they must continue to bolster up their cash holdings. Since the banks are receiving funds via an equity investment instead of a loan, it goes on the books as cash instead of debt. From an accounting standpoint, the banks are using this cash to make their books look better, which will in turn keep investors from dumping their stock and causing another failure.
So then the solution is…
There isn’t one. This was the plan of TARP: Inject money into the banking industry by any means necessary. The banks would then in turn loan to us. The government intervention was supposed to give investors confidence, however that doesn’t seem to be working. Instead the banks are using the cheap money from the government to just maintain their own stabilization. Imagine you need to drive to the gas station to get more gas. You have the money, but you have no way to get to the gas station. If the banks own the car, and the government gave them gas money, giving them more gas money will not help them get to the gas station. The solution is the program must be ended. TARP must die.
So we must go back to the drawing board and figure out how to walk to the gas station and buy a gas can. Many people think that buying up these bad loans and fixing them we will find our gas can. Possibly. But for now, all we know is that TARP is a failure.
Read TARP Oversight
 By The Weakonomist |
The Weakonomist is the founder of Weakonomics. Clicking the picture of the puppy will tell you more about him. If you like what you're reading consider subscribing to the blog, following him on Twitter, and checking out the related posts below. Please consider a donation if you really enjoy Weakonomics. Also keep in mind that nothing I say can be construed as financial advice. |
Be First To Comment!