Bernanke On TARP

Bernanke on TARP:

"The TARP's purchases of illiquid assets from banks and other financial institutions will create liquidity and promote price discovery in the markets for these assets. This in turn will reduce investor uncertainty about the current value and prospects of financial institutions, enabling banks and other institutions to raise capital and increasing the willingness of counterparties to engage. More generally, increased liquidity and transparency in pricing will help to restore confidence in our financial markets and promote more normal functioning. With time, strengthening our financial institutions and markets will allow credit to begin flowing again, supporting economic growth.

The interests of taxpayers are carefully protected under this program. First, the Congress has required extensive controls and oversight to ensure that the allotted funds are used appropriately and effectively. Second, the $700 billion allocated by the legislation is not an authorization to spend but rather an authorization to purchase financial assets. The Treasury will be a patient investor and will likely hold these assets for an appreciable period of time. Eventually, however, some assets will mature, and the Treasury will choose to sell others to private investors. Financially, in the long run, the taxpayer may come out either ahead or behind in this process; in light of the many uncertainties, no assurances can be given. But the ultimate cost of the program to the taxpayer will certainly be far less than $700 billion. Third, and most important, restoring the normal flow of credit is essential for economic recovery. If the TARP promotes financial stability, leading ultimately to stronger economic growth and job creation, it will have proved a very good investment indeed, to everyone's benefit.

To be sure, there are many challenges associated with the design and implementation of the TARP, including determining which assets will be purchased and how prices will be determined. The Treasury, with the advice and cooperation of the Federal Reserve, is working to address these challenges as quickly as possible. It is unlikely that a single method will be used for acquiring assets; inevitably, some experimentation will be necessary to determine which approaches are most effective. Importantly, the legislation that created the TARP does provide sufficient flexibility to allow for different approaches to solving the problem--subject, of course, to the close oversight that will ensure that the program's funds are used in ways that are in the interest of taxpayers."

Fine. Finally I get it.

1) Illiquid Assets will be bought, creating:

A: Liquidity ( From illiquid assets )

B: Price Discovery. ( How else could they be purchased? )

C: Certainty ( I suppose when it's done )

D: Willingness ( To provide A, liquidity )

2) Taxpayer guarantees are:

A: Oversight ( I'm real secure with this one )

B: The money isn't an outlay, but an investment ( True, but is it a good one? )

C: It will help the economy ( God, I hope so )

3) Challenges:

A: We don't know exactly how we're going to purchase these assets or for how much ( But we're smart guys, and, once again, there's oversight )

See my earlier post for the possible problems of TARP.

One final note, Tyler Cowen has a post on a paper defending reverse auctions.