Is the Financial Bailout Working?

By Kindred Winecoff

The most obvious answer would seemingly be "no". After all, equity markets have not recovered their lost value, and the recession is still spreading throughout the real economy. The Obama administration is planning a $700bn stimulus package to create jobs, and monetary policy has fired just about all its bullets without making too much of a dent.

But a deeper look gives some reasons for optimism. First, the banking industry appears to have been stabilized. There is still some restructuring going on, of course, and that will no doubt continue for quite some time. But the TED spread (a measure of how risky inter-bank lending is perceived to be) is back to relatively low levels, and there are other signs that credit markets have begun to thaw, and we may have escaped a liquidity trap. In short, the TARP program has improved conditions in the banking sector, if only by preventing further collapse.

Of course it is still too soon to tell how everything will play out, but just two or three months ago we were concerned about the collapse of the entire global financial system, and doomsday scenarios were not considered impossible or even especially unlikely. As we sit now, we are more concerned with getting the real economy moving again, the coming structural adjustment, and trade policy. I do not mean to diminish these other issues, but they are more indicative of a typical -- if deep -- recession than of a Global Financial Armageddon. And keep in mind that TARP has only used about half of the $700bn, which now looks as if it will be repaid to the U.S. Treasury with interest, so there is still some flexibility for the Fed and Treasury as we move forward.

And, as a recent WaPo editorial reminds us, this has benefits for everybody living inside this country, plus many more living outside of it. It's too early to do a celebratory lap, but so far TARP seems to be working.

Comments

[driftwood2:]

TARP has accomplished it's goal of preventing total collapse of the financial markets so in that regard it can be considered a resounding success. However, that was just triage. The patient is still sick. Ultimately, the tax payer will be on the hook for all the lost value of mbs's that the banks hold or held in the near past.

Jan 15 03:20 AM

[Steven Hansen:]

TARP phase I did what it was supposed to - keep the banks afloat. But there is so much crap these banks hold that we will see them go into failure mode again - requiring another round of our childrens future money being spent.

Jan 15 04:24 AM

[donzelion:]

"First, the banking industry appears to have been stabilized..."

That's what they said in April 2008 (and in April 2007, not only were things stable, but they would only get better...).

When a person is on life support, the fact that his heart keeps on beating doesn't mean that he's also getting better.

Jan 15 06:58 AM

[Vienna:]

I agree with the comments above, and would also like to add that solutions always have different pathes, so we will never really find out if not funding the banks and letting free markets work, would have been better for the tax payer in the long run. Maybe it would be better, but I do think it is just to soon to judge, things take time.

Jan 15 10:59 AM

[Glen L.:]

The failing banks, and banks that should have failed, are not lending normally; they're taking the TARP funds and building up their reserves. Basically, bad businessmen that should be weeded out of the marketplace are being propped up at taxpayer expense, to live again to make more bad decisions and further wreck the economy.

Is this the kind of "stabilization" we want? Where is the recognition of moral hazard? Why do people have so much faith in the idiots in government, most of whom have never run any business, let alone a successful one, and why do they applaud the effective punishment of good bankers (the vast majority) - e.g., with increased FDIC reserve requirements - to prop up the dolts of the industry?

Jan 15 11:00 AM

[vaughn:]

Neither the 700 billion TARP (or financial bailout) or the circa 825 billion fiscal stimulus will work. The reason is simple:

Consumers have debt up to their eyeballs. For those saver-consumers, they have managed their financial prudently and they will not incur debts at this turmoil time. For those spenders-consumers, they won't be able to incur debts due to the tightening of the banks. You see, for those who can borrow don't and for those who want to borrow, can't. That is the key reason why banks can't expand lending. The TARP money cannot increase lending and cannot create new credit.

For the circa 825 billion fiscal stimulus, the true spending is around 500 billion and the majority of which is used to support the spending of states. The really new spending coming out of stimulus plan is rather limited. Given the fact that consumers can cut spending easily in 2009 in the tune of 1 trillion dollars, the fiscal stimulus cannot jump start the economy and can only soft the blow of the recession.

In short, both TARP and fiscal stimulus plan are only tools to prolong the pain to the general public. Or more precisely, certain individuals and businesses can gain at the expense of the general public. If we don't have TARP and stimulus plan, then the general public can gain at the expense of certain individuals and businesses who were imprudently taking risks.

It seems Ben Bailout Bubble Bernanke intends to gamble it all. The outcome is clear: Either he succeeds by creating another bubble to prolong the music or by pushing US into final collapse.

Jan 15 10:44 PM