The Failure of TARP and the Government's Solution 8 comments
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Last month the nation debated the moral hazard of a rescue plan for the financial sector of the United States. Treasury Secretary Henry Paulson lobbied to Congress that House and Senate leaders needed to pass a bill authorizing the Treasury vast powers to purchase the distressed assets of banks across the nation. This plan would not only allow the banks to recover by drastically improving their balance sheets, but would restore confidence to our financial markets. That confidence is once again absent.
One Step Forward, Three Steps Back
At the heart of the financial system's problem is the existence of illiquid securities on the banks' balance sheet that inhibit the institutions' ability to lend. The government's $700 billion rescue plan, or the Troubled Asset Relief Program (TARP), was the solution to this problem. Instead, Paulson announced two weeks ago that he would use his vast authority for capital injections into the soundest financial institutions rather than to purchase the illiquid securities from banks' balance sheets.
This has created overwhelming uncertainty over the past two weeks as shares of financial institutions have tumbled to the lowest levels in over a decade, and the cost to insure these firms' debt has skyrocketed. It seems as if we are back to a period of ultimate pessimism that we were at only a few weeks ago.
The Search for a Solution
As credit markets have reflected the fear of investors over the past week, capital has only now begun to leave safe havens on news of further government intervention. The rescue of Citigroup at the beginning of the week brought investors back into risky assets as money fled short-term treasuries, which have been drastically overbought. This is because the Citigroup rescue, or bailout if you would prefer, has led the Treasury Department back on the right path in dealing specifically with the distressed assets. Moreover, the government's intervention is further verification to the market that they will support the larger financial institutions.
The government has had an immense effect on the markets thus far this year, and President-Elect Obama's policy announcements have been no different this week. The equity market's rally on Monday can be attributed to both the Citigroup rescue and policy announcements by Barack Obama which has eased uncertainty in the market. The market rallied strong in the last hour of trading on Friday on news that Timothy Geithner, President of the Federal Reserve Bank of New York, would be appointed Treasury Secretary during the next administration. Geithner's first-hand knowledge of the complex issues facing our financial system will add tremendous value to the new administration; yet we must keep in mind that this is one of the men responsible for the oversight of the largest financial institutions for the past five years.
Obama also announced over the weekend his support of another stimulus package by Congress, which would pump more money directly to consumers in an attempt to jump-start the economy. This plan would help retailers during one of the toughest environments for consumer discretionary businesses in decades, but it still would not address the fundamental source of our economy's trouble.
Lastly, the Federal Reserve announced Tuesday afternoon that they would be injecting an additional $800 billion in an attempt to unfreeze credit markets. The plan calls for $600 billion to be used to purchase government-chartered housing-finance companies' debt, and $200 billion will support consumer and small-business loans. These are both important and fundamental sources of weakness in our economy which should be addressed, but once again this does not address the source of the problem that lies within the private financial institutions.
Finding the Bottom
Although the confidence in our financial institutions has been shaken to its core over the recent weeks, we can find value in the long-term potential of our economy and institutions. Although the support of the Treasury Department in restoring confidence in illiquid assets has faced headwinds over recent weeks, we must hope that the next TARP tranche will be used to create a market for these distressed assets.
Disclosure: no positions
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This article has 8 comments:
This is all political hogwash! And, it has done more to set the economy back then add anything positive. If the money markets were frozen let them thaw on their own. The Free Market allows losers, thankfully.
I imagine few readers lived during the Depression as I did and so the destruction of self-respect, incentive and pride that FDR's polices resulted in. Who know where this country would be if Hitler didn't invade Poland. But one thing I am pretty sure of: We would be the over-consumptive country that we are. Hopefully this comeuppance will cure that deadly disease.
The 4 Golden Rules:
1. Reinstate the Up-tick rule
2. Crack down on naked shorting
3. Institute some rules on what should be said on National TV to prevent rumor-mongering
>>>>>&g... Pass a Wind-Fall Capital Gains Tax of 65% on ALL short sales retroactive to 01/01/08.<<<&...
BUILD.. BUILD.. BUILD.
JOBS.. JOBS.. JOBS.
DRILL.. DRILL.. DRILL.
FDR did not turn hoover's depression into a depression. it was already a depression thanks to the federal reserve shrinking the money supply. FDR was willing to try curative measures while hoover was willing to sit there & do nothing.
the wisdom of hank's flipflop will be debated by economists for 100 yrs.
> jack
> 3. Institute some rules on what should be said on National TV to
> prevent rumor-mongering
WOW! Are we to sacrifice all of our liberties in addition to the concept of free markets?! Will we become The United Socialist States of America?
Questionable choice of tense.
The bottom line: we need to END government's preemptive grab on our incomes -- abolish the income tax, property taxes, cap gains taxes -- and move to *solely* consumptive taxation to fund government, on all levels!! That puts the PEOPLE back in charge of their own money, regains some privacy (we have to tell the IRS waaay too much personal info), and puts limits on government -- we don't like how they are spending, we limit their revenue by cutting our discretionary spending!!
fairtax.org
On Nov 26 07:21 AM PrudentMan, CFA wrote:
> Government, especially the Fed, have proven they are part of the
> problem and are clueless about the solution. Like FDR in the thirties,
> where he turned a recession into a depression, the government is
> giving virtually everyone the idea that they will bail them out of
> their stupid, greedy mistakes. That, like FDR's CCC Camps, WPA,
> etc. exacerbate the problem instead of letting the Free Markets do
> what the do best: Self Correct?
>
> This is all political hogwash! And, it has done more to set the
> economy back then add anything positive. If the money markets were
> frozen let them thaw on their own. The Free Market allows losers,
> thankfully.
>
> I imagine few readers lived during the Depression as I did and so
> the destruction of self-respect, incentive and pride that FDR's polices
> resulted in. Who know where this country would be if Hitler didn't
> invade Poland. But one thing I am pretty sure of: We would be the
> over-consumptive country that we are. Hopefully this comeuppance
> will cure that deadly disease.