TARP Is Just the Beginning - Barron's 20 comments
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The $700B bailout bill that finally received Congressional approval last week is the first, not final, step in the right direction. Barron's argues that the bailout, also called the Troubled Asset Relief Program, or TARP, will certainly help, but further action is required to get credit markets working correctly again.
The key problem plaguing capital markets and the U.S. economy is the frozen credit market, with borrowers unable to obtain credit and lenders unwilling to extend it. TARP is aimed at buying troubled mortgage assets that have no takers at a discount above the fire-sale mark but still low enough to allow the government to theoretically turn a profit sometime in the future. The idea is that the sellers of the troubled assets will use the cash received from the government rescue to start making new loans and investments, bringing some much-needed liquidity back to the financial system. However, there's no assurance that the recipients of government capital will actually inject it back into the market, rather than just hoarding the cash and waiting for the crisis to pass on its own.
Barron's believes TARP needs to be followed by a coordinated interest cut by the Federal Reserve, the European Central Bank and the Bank of Japan, with the Bank of England, Swiss National Bank, Bank of Canada and Reserve Bank of Australia joining in. Lower benchmark rates should carry over to lower borrowing rates, directly helping consumers.
However, lower interest rates alone will not be enough. A middle ground needs to be found between the current mark-to-market accounting system and the total suspension of so-called fair-value accounting. Mark-to-market, many argue, has accelerated today's credit crunch, as a depressed market leads to depressed asset values, threatening capital and raising funding costs, and often forcing the sale of the marked-down assets as a way to raise funds. The total removal of fair-value accounting can be equally devastating, as learned from the Savings & Loan crisis in the 1980s. Instead, as the SEC wrote last week, assets shouldn't have to reflect the depressed prices of a crisis market, but should be valued with reasonable expectation as to their possible payoffs and risks in a way that satisfies both investors and auditors.
Nouriel Roubini, the New York University economist who warned about the credit crisis, takes the argument one step further. He says the government will ultimately have to "triage" the banking system, deciding which banks are solvent and deserve an equity injection, and which ones must be allowed to fail. He adds that the government will have to insure all deposits at all banks, and with the added government capital will come increased oversight.
The markets, too, think something must be done beyond TARP. Even as President Bush signed the bill on Friday afternoon, the Dow Jones Industrial Average relinquished an earlier 300-point gain and stocks closed down 157 points. The government must, at minimum, proceed with coordinated interest rate cuts, accounting changes and injection of additional bank capital.
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This article has 20 comments:
But if I was a betting man, I would say that the Fed will probably lower interest rates as this article mentions - you know why - because they haven't learned a DAMN thing in this crisis..
online.barrons.com/art...
A good article, and we can only hope someone is listening.
myweb.cableone.net/jim...
we're already seeing ireland and i believe another country do just that
another piece in the positive puzzle
As for "further action"....well, I guess you can lower interest rates but I agree with ScobbyDude that it doesn't mean banks will loan money (or if they do, they may price it higher for a riskier market). Beyond that, I guess you can start giving money to people (again) to spend. Frankly, at this point, not sure what else can be done or should be done as we already have several states going to the Fed with begging bowl in hand.
I'm waiting to see what happens this week with the CDO auctions.
i think the only option is for the nationalization of the banks. then the government can directly prime the economy.
I would advise all to follow Dr. Roubini's advice as he is a frequent guest on CNBC and Bloomberg...
Isn't the acronym TARP sooo ironic! C'mon boys and girls, let's throw it all under the TARP and maybe all those nasty taxpayers won't notice the mountain beneath.
"...but should be valued with reasonable expectation as to their possible payoffs and risks
in a way that satisfies both investors and auditors...": Jesus Christ, "reasonable expectations" and "possible payoffs and risks", the time for guesswork is over. Especially guessworks that let's the financial sector off the hook and simultaneously gives the taxpayer the shaft up where the sun don't shine.
"The key problem plaguing capital markets and the U.S. economy is the frozen credit market, with borrowers unable to obtain credit and lenders unwilling to extend it. "
Lenders refuse to lend to each other because they can't determine the credit worthiness of the borrower.
TARP killed the FASB transparency rules. TARP killed any chance of determining credit worthiness of the borrower. Thus, no new lending.
Thus, Congress again is the cause of turning a recession into a full-blown depression.