There seems to be this universal expectation at the moment that banks have some kind of obligation to lend money.
Such an assertion is ignorant. Bankers' fundamental obligation lies in their duty to maximize return to shareholders. Sometimes, that might involve lending to clients. Sometimes, it might involve purchasing eligible investments that have high yields. In the future, it might involve buying purple carrots and feeling them to blue rabbits, for all I know.
TARP complicates things, in the eyes of some. However, the government is only in a position to negotiate with current TARP seekers. For those banks with which it already cut a deal and made its TARP investment (see a list of these nationalized banks), the government lost its negotiating position when the deal was cut. Consider also that many TARP recipients were forced to accept the funds by Hank Paulson, even though the banks’ management was opposed to receiving the funds.
The government could say to current TARP seekers, “we will give you these funds only if you promise to leverage it 5x.” However, what if banks have to lend to unqualified borrowers in order to meet the 5x covenant? Doesn't that just exacerbate our current economic situation, in which too many people have too much debt?
A further hairball associated with TARP is that its effectiveness presupposes that the average consumer wants to borrow more money and increase his or her total debt. I don’t know about you, but I don’t know any consumers who want to borrow more money now. Consumers are already leveraged to a hilt. The deleveraging process has begun. The government cannot do anything to help the average consumer have less debt and more savings, which is ultimately what is necessary to restore consumer confidence.
Er, wait. I suppose the government could just print money so consumers could pay down their massive personal debt with inflated dollars. But that would have devastating negative externalities.