Squashed: Opposing the Bailouts?

Unfortunately, the first points are a bit at odds with official reports (although, all official reports do call the program a success). The Office of the Special Inspector General for the Troubled Asset Relief Program released a Quarterly Report to Congress at the end of last month. Things are not as clean as proponents would have you believe.

As for the stability:

• To the extent that huge, interconnected, “too big to fail” institutions contributed to the crisis, those institutions are now even larger, in part because of the substantial subsidies provided by TARP and other bailout programs.
• To the extent that institutions were previously incentivized to take reckless risks through a “heads, I win; tails, the Government will bail me out” mentality, the market is more convinced than ever that the Government will step in as necessary to save systemically significant institutions. This perception was reinforced when TARP was extended until October 3, 2010, thus permitting Treasury to maintain a war chest of potential rescue funding at the same time that banks that have shown questionable ability to return to profitability (and in some cases are posting multi-billion-dollar losses) are exiting TARP programs.
• To the extent that large institutions’ risky behavior resulted from the desire to justify ever-greater bonuses — and indeed, the race appears to be on for TARP recipients to exit the program in order to avoid its pay restrictions — the current bonus season demonstrates that although there have been some improvements in the form that bonus compensation takes for some executives, there has been little fundamental change in the excessive compensation culture on Wall Street.
• To the extent that the crisis was fueled by a “bubble” in the housing market, the Federal Government’s concerted efforts to support home prices — as discussed more fully in Section 3 of this report — risk re-inflating that bubble in light of the Government’s effective takeover of the housing market through purchases and guarantees, either direct or implicit, of nearly all of the residential mortgage market.

SIGTARP makes the analogy that we were in a car heading toward a cliff. TARP moved the cliff back, but stepped on the accelerator. Temporary stability and system stability are two very different things. The financial system is less stable.

As to point 2, the statements that TARP will turn a profit are usually very careful in their wording. Why? Because taken as a whole, TARP will not turn a profit. Only TARP investments in banks that are still around will turn a profit. From the quarterly report:

Treasury estimates that the net cost of operations for fiscal year 2009 was driven by losses it anticipates it will suffer on TARP investments in AIG under the Systemically Significant Failing Institutions (“SSFI”) program and additional invest- ments under the Automotive Industry Financing Program (“AIFP”). Collectively, Treasury estimates these investments will cost the taxpayer approximately $60.9 billion, $30.4 billion from Treasury’s investment in AIG and $30.5 billion from its investments under AIFP.

There are other, smaller, programs that will lead to losses.

SIGTARP is not the only official watchdog for the TARP program. Remember that Elizabeth Warren was made chair of the Congressional Oversight Panel for TARP because SIGTARP was not independent enough (it works with the treasury and has a bias toward reporting success). Professor Warren was not very charitable toward the success of TARP in her report to congress (though again, her official opinion is that things were better with TARP overall than without TARP).

Congress established broad goals for EESA to help address the economic collapse that was gripping the nation at the time of its enactment. It is apparent that after fourteen months the TARP’s programs have not been able to solve many of the ongoing problems Congress identified. Credit availability, the lifeblood of the economy, remains low. In light of the weak economy, banks are reluctant to lend, while small businesses and consumers are reluctant to borrow. In addition, questions remain about the capitalization of many banks, and whether they are focusing on repairing their balance sheets at the expense of lending. The FDIC, facing red ink for the first time in 17 years, must step in to repay depositors at a growing number of failed banks. This problem may well worsen, as deep-seated problems in the commercial real estate sector are poised to inflict further damage on small and mid-sized banks. Large banks have problems of their own. Some of them, waiting for a rebound in asset values that may still be years away, continue to hold the toxic mortgage-related securities that contributed to the crisis. Consequently, the United States continues to face the prospect of banks too big to fail and too weak to play their role adequately in keeping credit flowing throughout the economy. The foreclosure crisis continues to grow. Furthermore, the market stability that has emerged since last fall’s crisis has been in part the result of an extraordinary mix of government actions, some of which will likely be scaled back relatively soon, and few of which are likely to continue indefinitely. The removal of this support too quickly could undermine the economy’s nascent stability.

And TARP is probably best not viewed in a vacuum. If you include the guarantees provided by the Fed and the FDIC, there are still trillions of dollars in exposure to various loan guarantees that are frequently ignored by those claiming success. These programs were even more important for supplying liquidity to the system (based solely on their magnitude). They weren’t as good as TARP money as far as stability because they don’t count as Tier I capital. Loans do not count as Tier I capital, except for TARP money, because TARP money was not a loan, even though it had to pay interest and return the principle, like a loan. Yeah, it was a convenient little rule that if not for a special legal loophole specifically made for TARP, would be considered accounting fraud. Fortunately, lying about capital isn’t a crime when congress specifically enacts legislation allowing it. The Fed and FDIC programs didn’t have that special status.

As far as hyper-inflation, I’m a deflationist, so I’m not going to argue against that point. We’ve still got a bit of time left before our currency collapses. There’s plenty of room for currency appreciation in the interim.