Monday, December 22, 2008

Do We Need More TARP, Or Should We Bailout from the Bailout?

All of the first part ("tranche") of the $700 billion Troubled Asset Relief Program (TARP) has now been allocated, although not all spent. The last $17 billion or so has just been allocated for GM and Chrysler, notwithstanding the fact that they are not financial firms, the originally intended recipients of TARP money. Given the shifting uses for the money and the expanding range of recipients, the TARP really does seem like a giant go-anywhere do-anything slush fund at one man's discretion. It was set up this way in the midst of a panic, which, however, has now passed, so there hardly seems a reason to continue in this way. For any further "bailouts", Congress should go on record with debate and vote tallys and let them allocate money to specific entities for specific purposes if the votes are there.

Going forward, the Democrats want TARP money used, presumably among other things, to prevent foreclosures, while most Republicans are regrouping on how to cure bailout madness and mitigate whatever long term economic harm we've already bargained for.

Here's coverage from the December 20th Wall Street Journal (link):
The U.S. government's rescue of the auto industry drained what remained in the first half of Treasury's $700 billion bailout fund, prompting Treasury Secretary Henry Paulson to call on Congress to release the rest of the money…. Mr. Paulson has not decided whether to formally request the second half of the Troubled Asset Relief Program -- known as TARP -- or leave that task to the Obama administration….
House Financial Services Committee Chairman Barney Frank (D., Mass.) has previously said Mr. Paulson's ability to get that next $350 billion has "been destroyed" unless he agreed on a foreclosure plan that carried Mr. Obama's blessing…. Democratic lawmakers are angry the Bush administration resisted calls to embark on a large-scale program to prevent foreclosures, and that government-backed banks aren't lending more…. Democrats want the rescue to include some version of a foreclosure-mitigation plan floated by FDIC Chairman Sheila Bair. Her plan is aimed at getting lenders to modify roughly two million mortgages, with the government sharing some of the losses if borrowers default on the new loans. Mr. Paulson argued the plan was too costly and could encourage banks to foreclose and borrowers to stop making payments to qualify.
Republicans, meanwhile, are upset about the shifting focus of TARP, a program they finally supported after a protracted fight that rocked financial markets. While Mr. Paulson initially planned to use the TARP to buy bad loans and other distressed assets, he changed gears to instead buy stakes in banks. Republicans blame the Bush administration's missteps for losing party seats in November….When Mr. Paulson met with House Republicans at a closed-door meeting in September to win support for the billion bailout package, lawmakers said his message was confused and muddled.
What to me is disturbingly missing from all I have read about the TARP and the uses to which the money has been put is the absence of specific metrics, or target indicators, to enable us to determine if the money is having the intended effect. What is the purpose of the money -- is it to increase liquidity, or to ensure solvency, or prop up housing prices, or perhaps to stabilize the stock market? Of course, this uncertainty about purpose is the first problem. Then, how do we know if "it" is working? Do we track the spread between the LIBOR rate and treasuries, or rather how much money is being loaned by banks? Or perhaps housing sales, or maybe the Dow and S&P 500 indexes? In part, the absence of target metrics is a sign of lack of consensus about the specific goals of the program and operational inexperience about how to achieve them.

Meanwhile, there's a distressing new report from the liberal Associated Press analyzing what banks that received TARP money have been spending on bonuses and perks (link):
Banks that are getting taxpayer bailouts awarded their top executives nearly$1.6 billion in salaries, bonuses, and other benefits last year, an Associated Press analysis reveals. The rewards came even at banks where poor results last year foretold the economic crisis that sent them to Washington for a government rescue. Some trimmed their executive compensation due to lagging bank performance, but still forked over multimillion-dollar executive pay packages. Benefits included cash bonuses, stock options, personal use of company jets and chauffeurs, home security, country club memberships and professional money management, the AP review of federal securities documents found. The total amount given to nearly 600 executives would cover bailout costs for many of the116 banks that have so far accepted tax dollars to boost their bottom lines.
So where will it end, this slippery bailout slope we're tumbling down? Who knows, but wherever we land, we'll be none the better for the trip. Mark Steyn wrote on December 16 at "The Corner" weblog at National Review online:
So who are the victims? Us - if we don't find a way to bailout from the bailout. Both the bank bailout and the auto bailout are responses not to the failures of the market but to the failures of attempts to rig the market, whether through government prevention of normal risk evaluation in bank loans or through the Big Three/UAW agreements that assumed a God-given hammerlock on market share for all eternity. We should oppose the bailout for the same reasons we oppose lifelong welfarism, for the most basic of conservative principles: If you reward bad behavior, you get more of it.

John M Greco