Rolling out the TARP
Roll out the TARP, because it’s raining criticism at the Treasury. According to today’s Wall Street Journal, a congressionally commissioned panel has harsh words for the management of the Troubled Asset Relief Program (TARP).
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“The panel’s initial concerns about the [Troubled Asset Relief Program] have only grown, exacerbated by the shifting explanations of its purposes and the tools used by Treasury,” said the draft report, which found that the department has “not yet explained its strategy” for stabilizing the financial markets.
The report faults Treasury on a variety of fronts: having no ability to ensure banks lend the money they have received from the government; having no standards for measuring the success of the program; and for ignoring or offering incomplete answers to panel questions.
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Gee, Treasury can’t explain its strategy for TARP? Could that possibly be because Treasury doesn’t have a strategy — or more precisely, because it has had so many?
First the TARP was supposed to provide banks money to put a floor under troubled assets (hence the weird title) that the market allegedly could not price. Then it morphed rapidly into a welfare program to bail out troubled banks and investment firms. Soon it was funneling emergency money to automakers as well, illegally and outside its charter.
Treasury has no way of tracking the TARP money or determining whether it is being lent? Maybe that’s because the mission of TARP has been so muddled that banks don’t even know what they are supposed to do with the money, and because Treasury has neither the manpower nor the capability to track hundreds of billions of dollars (remember the earlier Journal articles on Treasury’s search for staff?).
The lesson that continues to elude Treasury and Congress: Fixing markets is the job of markets, not taxpayers or federal bureaucrats. How many hundreds of millions more will it cost to find that out?
UPDATE: Michelle Malkin reports on Congress’ misguided efforts to remedy another complaint aired in the Congressional report — that Treasury isn’t doing enough to help homeowners. Gracious, aren’t lower (read: more affordable) home prices and plummeting interest rates doing enough?
626 Comments to Rolling out the TARP
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Bob, I’m a big fan of capitalism and free markets, and I agree that it’s scary that hundreds of billions of dollars are being sloshed around based on rapidly shifting goals.
I also agree that lending to the auto industry was a perversion of the letter and spirit of TARP, which was designed to support liquidity in the credit markets. The automakers should sort out their problems in bankruptcy court if necessary. (The complicated bankruptcy process is itself, btw, a distortion of market forces. But at least it’s a well-traveled path, with checks and balances developed over many decades.)
But as for the financial institutions, I think the government had to act in some fashion, as the credit markets were virtually frozen. If major banks stop honoring overnight loans and commercial paper, it would quickly lead to very ugly consequences. For example, even very healthy, well-capitalized major companies would start to find themselves unable to issue payroll checks in a timely way.
Kirk,
The TARP program could never work. Sure, the banks could have tried to take the money and provide a floor for assets. But it would have been artificial anyway. You can’t force a buyer to take assets at anything than an actual market price. Sooner or later, even assets refinanced in this way would have an actual price attached to them as they were traded.
The impossibility of the task was basically admitted by Hank Paulson when he changed the mission of TARP almost immediately after its passage and simply used it as a means to shovel money at banks.
How do you get people to lend again? Instead of driving interest rates down to zero and debasing your currency, you allow interest rates to rise to reflect risk. Sooner or later, if interest rates rise high enough and provide an adequate return to offset risk, investors will lend funds. We saw that happen as CDs began to offer higher rates to attract savers. Overseas investors will also infuse money in pursuit of higher rates, driving the dollar higher and making US products cheaper abroad.
Over time, the influx of savings - an increase in supply of money - will reduce the cost (interest rates) and things will go back to normal.
The thing you don’t do is try to artificially create liquidity by stuffing cash into the system. When that happens, no one will lend unless the money is government-backed - why would they do otherwise if others are getting subsidized? You’re actually restricting lending, instead of increasing it as a market-based solution would do.
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