Wednesday, November 12, 2008

Goodbye TARP

Today, Secretary of the Treasury Hank Paulson announced that they are scrapping the plan to buy troubled assets from banks. It appears that they started to realized three things. One, the ability to come up with a true value for the assets was going to be very hard and take a long time (and speed is of the essence). Two, the amount of leverage used to buy these assets meant that the affect on banks balance sheets was going to be minimal. Three, these banks have not been using the government money they have received so far and instead have been hoarding it - this would likely be even worse if they bought the assets. Other problems included the incentive for banks to only sell their worst assets, the problem of a huge and costly program needed to resell the assets and the continued deterioration of the housing market on which these assets are based.

[By the way, to give credit where it is due, I was on OPB with Earl Blumenauer right after the TARP was first announced and his opposition to it was partly based on the amount of time it would take to do it. Off air, I disagreed arguing that the announcement itself would be enough to restore enough confidence to get markets unstuck. He was right, I was wrong. I have been consistently too optimistic about the crisis until recently...and now I am just depressed.]

Injecting cash into banks directly through the purchase of preferred stock is a better solution for all three problems - but there needs to be more than persuasion used to get banks to not sit on the money they get, something the government realizes and is trying to address. It is also a very good idea to exert more effort to stem the erosion of the housing market which is both at the heart of the crisis and where most less-affluent Americans are having serious trouble as well as shore up consumer credit where things like the drying up of funds for student loans is both immediately troublesome but also exceedingly worrisome for the future if students are being prevented from getting a college degree.

2 comments:

Gregory said...

Today Paulson announced he is changing gears and planning to put some money into student loans. It seems to me this a remedial, defensive response to a specific problem. Is this what the Treasury Secretary should be doing? Isn't this more the role of Congress?

I admit it--I haven't fully represented the plan, which is still being flushed out. But Paulson's plan would also help credit card issuers and auto lenders to provide more credit to consumers. So this may be a strategic shift that goes beyond helping students stay in school.

Nevertheless, it leaves me with little confidence that Paulson has a handle on the situation.

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