Resolution Trust Corp vs. Troubled Asset Relief Program

The Federal Reserve's program to help alleviate the stress in the credit markets has formally been called the TARP which stands for Troubled Asset Relief Program.  Informally, though, many are hoping it turns out to be an RTC II, given the program's success in the late 80s and early 90s.  Given the comparisons between that period and now, we looked to see how stocks and bonds were trading then versus now. 

As shown in the charts below, there are several key differences between the two periods.  For starters, back then stocks were in rally mode heading up to the formation of the RTC.  Today, we're in a bear market.  On the fixed income side, bond yields had fallen sharply leading up to the formation of the RTC in August 1989, while currently Treasuries are in a trading range. 

But the biggest difference for Treasuries between now and then is that in 1989, the Ten-Year US Treasury was yielding 8%.  Last week, the yield on the Ten-Year spiked 40 basis points on news of the new bailout program.  But even after that spike, it is yielding under 4%, which is less than half the levels it was trading at in 1989!

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Comments

[Geronimo]

Sheila Bair, Chairman of FDIC said that there is no need for a bailout. FDIC handled Indymac and others. They are ready to handle more. They hardly miss a beat when they take over a bank. They are much quicker and more cost effective than the Paulson plan.

Even if the Bailout Express cannot be stopped, the CARE PACKAGE should be on the basis of loans, not gifts. These loans could be available to all banks at 8% interest. The loans should have priority over all existing bonds.

Paulson says we must act quickly. It is much quicker to make loans on a standardized basis than to negotiate with thousands of institutions for assets that cannot be accurately valued. Valuations might be politically valued, rather than objectively.

Banks can reliquify the rest of the economy.

Under this approach much less money should be required. The
government should get back almost all of its investment plus interest.

Confidence will be restored.

The Paulson approach would be slower. Even if it restores confidence, this would be temporary.

As the dollar loses value and doubts about the creditworthiness of the U. S. increase, our ability to finance escalating deficits will be impaired.

If you calculate the dollar's most recent loss in value multiplied by the number of dollars outstanding, this alone may amount amount to a cost of more than $700 billion, and will escalate under the Paulson plan.

There is no guarantee that we will be able to finance government debt for much longer.

A more radical and even faster approach would would be to temporarily reduce bank capital requirements slightly with appropriate conditions.

The Paulson plan is 1000 times as radical, more than 1000 times as costly, and slower.

Paulson says that not all of the $700 billion will be lost. If we get back 20% of The $700 billion and spend 10% for administration, we will lose $630 billion in addition to the more staggering indirect costs.

2008 Sep 23 04:56 PM