Wednesday, April 22, 2009

The post hoc case against TARP

A response to a Liberal talking point to defend the bailouts on Rick Moran's Right-wing nuthouse blog: If AIG had failed, we would have had a national and worldwide catastrophe. Millions of Americans would have lost their retirement and savings that were wrapped up in the CDS’s that were gambled on and insured by AIG and others.”

First, AIG was saved prior to TARP. Second, AIG *has* failed in the sense that stockholders are practically wiped out and the company is now a ward of the state. Third, the whole Paulson “You must do X or the world will collapse” missed the BIGGEST OBJECTION: There were a number of alternatives that in the end were superior to the TARP bill; the conservative Republicans pointed out how to add insurance backing for assets at much lower cost; liberals and FDIC chair piped up about expanding FDIC insurance. Wrt to AIG, there too it is false to assume a bailout is the only way to save the global CDS market: You neglect the difference between Ch11 and Ch7. CDS counterparty protection could have been given protection in a pre-pack BK with the Fed backing that up.

“I was flat out against TARP at first, but have taken the time to learn more about what is going on. ”

Well, I went the other way. Ultimately the claim that TARP was vitally needed is simply refuted by the track record: It didnt do what it was sold as being needed for, and it didnt solve the problem at hand. the Congress voted for a TARP that would buy up toxic assets. Remember? Guess what? The week after TARP was passed the stock market fell 18% in one week. A vote of no confidence. Two weeks later Paulson changed course … Stock market cheered the change as it was clear there was a 10to1 advantage to shoring up bank balance sheets through direct investment. Only now we find out that half the banks given the money felt they didnt need/want it anyway! And the claim that this would expand lending has not borne out (not unexpectedly, since the banks just used it to pad extended balance sheets). Strangely, we are back to buying the toxic assets in Geitner’s TARP III.

So TARP didnt do what it billed as being needed for up front and has not solved the so-called credit market squeeze. The commercial BBB to AAA spreads are as high as in November. And we have 2 million less jobs now than in November to boot. All of this shift of financial risk from the financial sector investors to taxpayers has not in the end changed the economic trajectory much at all. We are going through a recession to clear out the defaulted and devalued over-investment in certain sectors and any TARP, stimulus or bailout will just be pumping air into a busted deflating balloon.

TARP and Geitner’s TARP III has been the big-Gubmint-solution to a problem: Throw enough money at the problem and hope some of it sticks.

The most effective lever we have is monetary policy, not bailouts. for example, the LIBOR-Fed rate issue was and is solvable via direct Fed action. The Fed’s zero interest rate policy and their direct purchases of commercial paper has had a lot more to do with helping LIBOR and overall situation right now than anything else. (Albeit another short-term gain we will pay for down the road).

You can at best argue that bailouts like TARP are mitigating someone’s economic pain, but you have to ask to what extent should taxpayer money be going to bail out, say the Abu Dubai sovereign investment funds’ insurance backed investments in US financial assets? Their Citigroup bonds? Their commercial RE loans in CMOs? Somehow when you are FOR it, all the billions are going to widows and orphans; when you are against it, its ‘greedy wall st bankers’. Same pot o’ money in both cases.

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