Wednesday, November 12, 2008

Bye, Bye TARP

Has Hank Paulson lost all or merely most of his credibility?

Quotes from his statement today:

"Over these past weeks we have continued to examine the relative benefits of purchasing illiquid mortgage-related assets. Our assessment at this time is that this is not the most effective way to use TARP funds, but we will continue to examine whether targeted forms of asset purchase can play a useful role, relative to other potential uses of TARP resources, in helping to strengthen our financial system and support lending. But other strategies I will outline will help to alleviate the pressure of illiquid assets."

OK, so TARP is not going to work out as planned, in the form of buying the mortgage-backed securities that were at the heart of the initial problem. I am on record as saying that success of this program would be measured by how much MBS they had bought 3-4 weeks into the program. As the answer, up until the AIG purchase announced this week, was ZERO, we can assess the program as pretty much of a failure. But fine. Lots of people thought it was going to be hard to figure out ways to effectively buy those MBS.

But, Paulson and Treasury have been standing by TARP for the last few weeks. Saying they were still moving forward, just taking time to work out the plans. All of a sudden...Change of plans.

Come on, at least a little more explanation than saying it "is not the most effective way to use TARP funds..." would be nice. Congress signed a bill for $700 billion of expenditure on the basis of a plan that is now not going to be implemented, and that is all the explanation we get????

But Paulson and Treasury still have $700 billion -- no, wait, $700 b. less what they have spent becoming owners of some banks and AIG -- and that spare change is obviously burning a hole in their pocket. Plus Nancy Pelosi has her sights on Michigan and the auto industry, so she is putting some pressure on them as well (TARP obviously applies to all troubled assets, and if the auto industry does not have troubled assets, who does?).

So another quote by Paulson:

"Second, we are examining strategies to support consumer access to credit outside the banking system. To date, Fed, FDIC and Treasury programs have been targeted at our banking system, and the non-bank consumer finance sector continues to face difficult funding issues. Specifically, the asset-backed securitization market has played a critical role for many years in lowering the cost and increasing the availability of consumer finance. This market is currently in distress, costs of funding have skyrocketed and new issue activity has come to a halt. Today, the illiquidity in this sector is raising the cost and reducing the availability of car loans, student loans and credit cards. This is creating a heavy burden on the American people and reducing the number of jobs in our economy. With the Federal Reserve we are exploring the development of a potential liquidity facility for highly-rated AAA asset-backed securities."

Ah. Illiquidity in the credit card receivables market is beckoning for government intervention. Because, if consumers can't borrow, obviously they can't buy anything and the economy will tank.

TARP is slipping rapidly from a program aimed at preventing systemic financial system failure as evidenced by the failure or near failure of major financial institutions to an almost Keynesian-like stimulation of the economy. Surely Paulson sees a difference between the failure of Lehman Bros., and the threat of runs on banks and near-banks like money market funds; versus "raising the cost and reducing the availability of car loans, student loans and credit cards." When the US financial system appeared to be on the brink of ceasing to function in most important ways, that was a time for major and innovative intervention, such as TARP and, maybe most important, the support by Treasury and the Fed of the commercial paper market (which money market funds rely on). But are we now just shifting to supporting credit cards and car loans so that we don't reduce the number of jobs in the economy?

Is anyone surprised that the market fell over 400 points today?


Jason said...

Once again Congress has failed to use its congressional oversight to protect the American people.

"Fool me once
Shame on you
Fool me twice
Shame on me."
--Chinese Proverb

Thomas Park said...

Now I'm confused. Wasn't the U.S. government supposed to just buy all of these CDOs in the first place? Wouldn't the proceeds from the sale given the banks more than enough to give the market confidence as to the accuracy of their balance sheets?

Now they're talking about buying a stake in Citigroup. Doesn't this just create a moral hazard?

Why is it so hard to just buy the assets? I'm from Canada and it's bad when the Washington is getting involved in the economy more so than Ottawa.