It has been several months now since the Troubled Asset Relief Program was introduced as part of the proposed solution to the subprime mortgage crisis. TARP was created and implemented as a way to stimulate lending and provide relief for homeowners.
The Congressional Oversight Panel's second report (issued Jan. 9) about TARP indicates that the goals of TARP are to:
1. Stabilize the financial market.
2. Stabilize the housing market.
3. Protect taxpayers.
It was a stated goal of the TARP and the Treasury that this $700 billion in giveaways would cause banks to lend more, providing more credit and support to homeowners, avoiding preventable foreclosures.
HOWEVER, this has not been the case.
There are several, deep fundamental flaws that have not been addressed or changed with the use of the TARP funds.
First of all, the money is not being used to lend more. The money is given out with absolutely no strings attached nor requirements of how to use it. It is extremely unclear how this could bolster more loans. Many TARP banks, financial strategists, and Congressional reports indicate that the banks and firms are not using the money to make more loans. In a recent NYT article, Director of (TARP participant) Whitney National Bank, John C Hope III, said that "We’re not going to change our business model or our credit policies to accommodate the needs of the public sector as they see it to have us make more loans".
John C Hope III is not alone. His sentiments represent the general sentiments of most other TARP banks. They are using the money to:
1. Acquire other banks.
2. Fortress their budget sheets with excess capital
And, most importantly, 3. TO SURVIVE THE RECESSION.
So, ultimately, the funds have not been used properly to provide relief in the credit market. But, the funds couldn't possibly do any harm, could they?
Yes, they could.
The other major flaw is that the Treasury has been extremely dodgy and unclear about which banks they decide to include in TARP. I'm sure most of you are thinking, "oh well it's the Treasury, I'm sure they'll decide correctly." BUT THIS VERY FACT UNDERMINES CAPITALISM IN THE UNITED STATES.
The banks and companies that are the recipients of this money are using it to essentially weather the storm. This means that companies that are a part of the TARP program aren't stimulating the economy at all. No, in fact, the only thing that they are doing with the money is amassing it to protect their arse. What about the other banks? What about the other financial institutions that aren't on this list? How is it fair for the Treasury to decide who lives and who dies based on criteria that, so far, seems completely and totally arbitrary?
Peter Schiff, director of Euro Pacific Capital puts it best in this video. EuroPac, his investment company, is not a part of the TARP program. He gets no money. What's wrong with this? Well, the failing and sick banks that are benefitting from TARP as a result of free money thrown their way or as a result of mergers, are being allowed to stay afloat even though they took on billions of dollars in bad loans. They took on these bad loans because of poor management and poor financial strategy. EuroPac, however, did not take on bad loans. This is a time when EuroPac could look to pick up staff, securities, etc. from these failing companies. But, the government is keeping these sick companies afloat. This demolishes the investment opportunities for non-TARP banks and firms.
Start watching at 3:00 for the relevant part of the argument. However, I encourage you to watch the whole video along with the first installment. He presents a series of very interesting points.
What's wrong with this? .... It is completely and totally anti-capitalism. The government is deciding who should benefit and who should gain from this under the guise that their decisions are best for the consumer. However, as has been demonstrated by John C Hope III and other like-minded banks and firms, the TARP funds are NOT being used to provide relief to the consumers.
This situation, in a more free market, would work as follows: the bad banks would likely go under. The banks and firms that made smart decisions would be able to pick up the value from these failed banks and firms on the cheap so as to benefit and grow from the opportunities. However, this is not happening. The gov't is interfering, propping sick banks up, deciding who benefits, and getting rid of the customary investment opportunities that would have otherwise been available to prosperous or healthier investment groups like EuroPac.
How is our tax money being used????
It's simple. The gov't is using it to undermine capitalism.
I don't want to throw out accusations of corporate cronyism or a grand conspiracy theory to nationalize the financial sector or anything of that sort. This is for several reasons. Firstly, God knows that more financial panic is the last thing that we need right now. Secondly, I have no evidence nor belief that this is the case. All I'm saying is that TARP is not only failing to help consumers, but it's hurting financial recovery in this country.
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I agree that the government is starting to focus more and more on moving away from capitalism and towards what is supposedly the best form of economics; the welfare capitalist state. This is undoubtedly false. America was built by individualist capitalism, and ever since we have strayed off that path America has been ailing economically and politically.
ReplyDeleteCouldn't agree more with what you said Chris.
ReplyDeleteChris,
ReplyDeleteMy advice to you is you’d better quit straying from the party line like this or your future in our “New United States” will be forever compromised. As Don Vito Corleone says to his eldest son in The Godfather. “Don’t you ever tell anybody outside the family what you’re thinking”.
What we’ve witnessed is the nationalization of the American banking system. It’s been done by cunning politicians with the unwitting support of the media, apparently ignorant of history, who control the thoughts of enough of the electorate to enforce their will with only a barely detectable amount of voter fraud required.
The bi-partisan, corrupt elements of our government have control and it might be too late to ever get our previous way of life back. This is, indeed, the end of the world as we’ve known it.
Your observations hit the mark. It’ll be interesting to hear from folks who disagree but, I think the more pressing question is; how can you members of the rising generation, ever get back to a system based on merit and accomplishment?
I wonder if Mr. Schiff has any ideas about that?
Son of a son of a slave.
You make many good points, particularly about picking winners and losers as well undermining capitalism. While the funds may not have stablized the housing market nor protected the taxpayers, they did help stablize the financial markets. If SOMETHING hadn't been done last fall, we would be in a much worst place right now. Now the government needs to spend the remainder of the TARP funds in a much more transparent manner, hopefully to achieve the other goals!
ReplyDeleteAfter listening to Mr. Schiff, it seems that he doesn't think there is a way back from this takeover.
ReplyDeleteIt seems the thrust of his comment aimed at how, by rescuing failed enterprises, we've punished successful enterprises by preventing them from capitalizing on natural result of those failures. That's a key part, (arguably, the key part) of free market capitalism.
My blunt observation is that TARP isn't rescuing any enterprises, it's seizing them and demanding influence over their management. In doing so they've made it nearly impossible for healthy enterprises to grow. No growth equals no survival. It's the demise of free market capitalism. Is it intentional?
Either way, we're left having to beat 'em or join 'em.
Well I think the popular conception right now is that the free market has failed. They say that the housing bubble, the wall street debacle and the subprime mortgage crisis are products of deregulation. But, in truth, we haven't had free markets in a long, long time (try never). It is my opinion that the subprime mortgage crisis was due MOSTLY to the lowering of interest rates by the Federal Reserve. The Fed encouraged lending for consumption and housing by lowering the interest rate. It was a completely foreseeable outcome that the housing bubble would have to burst and in doing so would cause an extreme number of defaults, bad loans, and foreclosures. Peter Schiff has quite a fascinating argument about this whole issue. I'll try to put up more links to his videos. He's got a real doomsday perspective on this whole situation, which is very interesting but not entirely convincing. He's counting on this new plan to be inflationary to the point where the dollar is worthless and no countries will lend to us. I think it will be inflationary but not to the point that he's saying.
ReplyDeleteBut, you're totally right. The markets are getting more controlled by the minute right now and I fear the government is using this crisis to greatly extend their control over the financial sector. I'm very afraid for the future of the economy. It looks as though only very few are still preaching limited government and free markets.