. “That hang-up is not compatible with the depth of this crisis"

From Bloomberg:

"Banks’ ‘Catatonic Fear’ Means Consumers Don’t Get TARP Relief

By James Sterngold

Jan. 5 (Bloomberg) -- As the new owner of $172.5 billion of preferred shares and warrants in 208 U.S. financial institutions( WHAT WE GOT FOR THE MONEY ), the Treasury Department hasn’t succeeded in thawing frozen credit markets, leaving taxpayers propping up an industry that won’t lend to them.( THE CREDIT STIMULUS WITHOUT THE STIMULUS )

While inter-bank lending rates have fallen since Congress approved the $700 billion Troubled Asset Relief Program on Oct. 3, most bank lending to consumers remains tight and interest rates high. The average credit-card rate was 14.33 percent on Dec. 16, according to IndexCreditCards.com in Cleveland, almost unchanged from 14.41 percent in October 2007.

That’s prompted criticism from Alan S. Blinder, a professor of economics at Princeton University in New Jersey and a former Federal Reserve vice chairman, who says the government should take a more active role as a stakeholder in the nation’s banks.

“With the banks in a state of catatonic fear now( THAT'S IT. SHELL-SHOCKED. THE FEAR AND AVERSION TO RISK. ), they’re just sitting on the capital,” Blinder said in an interview. “I don’t fault the banks one bit( THEY'RE DOING WHAT'S IN THEIR BEST INTEREST. ), since this shows Wall Street they’re safer, but then this doesn’t get you much improvement. If you’re taking money from the public purse( ON THE OTHER HAND, AS AN INVESTOR NOW, WE WANT THEM TO DO WELL AND PLAY IT SAFE. ), we should get something in return, and we’re really not.”( AS I'VE SAID, TARP IS A HYBRID, WITH THE BANKS AND GOVERNMENT HAVING DIFFERENT GOALS. )

Jeffrey Garten, a professor of international trade and finance at the Yale School of Management in New Haven, Connecticut, and a Commerce Department undersecretary during the Clinton administration, says banks should be forced to increase their lending or risk having taxpayer money taken away( I AGREE ).

“The government isn’t acting aggressively enough to demand a quid pro quo,” Garten said. “The public good is the key to the private good in this case. It’s not the other way around( I AGREE ).”

$8.5 Trillion

Although the government has committed more than $8.5 trillion to energizing the economy, and the Fed cut a key lending rate almost to zero, banks haven’t made it easier to borrow. The Fed said consumer credit fell by $6.4 billion in August, the largest drop in 65 years, and then by $3.5 billion in October, the first time since 1992 that there were two months of declines in a year.

In its most recent quarterly Senior Loan Officer Opinion Survey in October, the Fed reported that about 85 percent of U.S. banks said they had tightened standards on commercial and industrial loans to companies with more than $50 million in annual sales, up from 60 percent in July. Ninety-five percent said they increased the cost of those loans. About 70 percent said they made it more difficult to obtain prime mortgages, and almost 65 percent said they did the same for consumer loans.( THEY'RE SHELL-SHOCKED )

Mortgage Rates

While mortgage rates have declined, they haven’t fallen as fast as bank borrowing rates, meaning financial institutions are demanding more profit for every dollar they lend( THEY NEED THE MONEY, AND MUST PAY MORE FOR DEPOSITS SINCE DEPOSITORS ARE AFRAID AS WELL. ). Average rates on 30-year residential mortgages fell to 5.14 percent last month, according to data compiled by McLean, Virginia-based Freddie Mac. That’s down from 6.67 percent in June 2007, before the worst turmoil in the housing market. At the same time, the spread of mortgage rates over the 10-year Treasury bond yield rose to 2.958 percentage points from 1.567.( IMPLICIT VERSUS EXPLICIT GUARANTEES )

The spread of rates on so-called jumbo mortgages( DUE TO GUARANTEES ), those of more than $729,750, is close to a record at 1.6 percentage points above the rate for smaller mortgages that conform to terms of ones Freddie Mac and Fannie Mae will purchase, according to financial data firm BanxQuote in White Plains, New York. A year ago the difference was 0.23 percentage points.

High interest rates have angered consumers. The Fed has offered relief in the form of rule changes that allow banks to raise rates only on new credit cards and future purchases, not on existing balances. Banks will also have to give cardholders 45 days notice of changes in terms, up from 15 days. Those changes aren’t scheduled to take effect until July 2010.( THEY WERE GOOD CHANGES )

‘We Own Them’

“We own them now( WE SHOULD HAVE. THE SWEDISH PLAN WOULD HAVE BEEN PREFERABLE. ), and we should use that to make sure they stop ripping us off,” said Gail Hillebrand, head of the financial-services campaign at Consumers Union, an advocacy group based in Yonkers, New York. “We shouldn’t allow banks to use the money to support things that hurt consumers and taxpayers. What we’re looking for is responsible behavior, not social benefits.”( KEEP LOOKING. )

Bank profits or returns on the government investments are secondary concerns( TRUE. BUT A VALID ENOUGH CONCERN FOR THE BANKS TO IGNORE LENDING. ), Hillebrand said.

That view is opposed by free-market advocates such as Gary Becker, a professor of economics and sociology at the University of Chicago and a Nobel Prize winner, who says the primary aim of the government bailout should be a hasty withdrawal from investments that shouldn’t have been made in the first place.

“If you believe in a private-enterprise system( WE DON'T HAVE ONE. WE HAVE A WELFARE STATE. ), you use competition to control the banks, not a stakeholding,” Becker said. “It would be a grave mistake to use these private institutions for social goals.”( NOT IN A CALLING RUN. )

Paulson Changes Course

Diane Casey-Landry, chief operating officer of the American Bankers Association, a trade group in Washington, said that bank profitability had to come ahead of any demand to ease lending.

“Taxpayers should get a return on their investment,” Casey-Landry said. “We have to go back to a time when we realize not everyone is entitled to get a loan. What is going to get us out of this recession is sound lending to people who are going to pay it back( THAT'S TRUE ), not throwing money at people who can’t.”

When Congress passed the Emergency Economic Stabilization Act in October authorizing TARP, the funds were supposed to be used to acquire troubled mortgage-related assets from banks in order to ease credit.

“The underlying weakness in our financial system today is the illiquid mortgage assets( CAN'T BE SOLD ) that have lost value as the housing correction has proceeded,” Treasury Secretary Henry Paulson said on Sept. 19. “These illiquid assets are choking off the flow of credit that is so vitally important to our economy( THROUGH A CALLING RUN. THE NEED TO RAISE MONEY WHEN YOUR ASSETS AREN'T AVAILABLE TO SELL OR BORROW AGAINST. ). When the financial system works as it should, money and capital flow to and from households and businesses to pay for home loans, school loans and investments that create jobs.”

TARP Allocations

Two weeks after the legislation was passed, Paulson changed course and said it was more important to recapitalize the banks, allowing them( HYBRID ) to determine how best to deploy their capital.

Since then, Treasury has allocated $250 billion to buy non- voting preferred shares of banks paying a 5 percent annual dividend, as well as warrants convertible into equity. The investments range from $25 billion each in JPMorgan Chase & Co., Citigroup Inc. and Wells Fargo & Co. in San Francisco to $1.6 million in Westminster, California-based Saigon National Bank.

In addition, $40 billion has gone to New York-based American International Group Inc.; another $20 billion to Citigroup in New York, along with a $5 billion guarantee against possible losses; $20 billion to purchase consumer and small-business loans; and $13.4 billion to Detroit-based automakers General Motors Corp. and Chrysler LLC.

‘No New Lending’

Last week the government announced that $5 billion of TARP funds would be used to purchase preferred shares and warrants in GMAC LLC, the automaker’s financing arm, with Treasury separately lending another $1 billion to GM to support GMAC’s transition into a bank holding company.

With the exception of GMAC, which immediately began offering loans to GM customers with lower credit scores in order to halt the decline in auto sales, most financial institutions that received TARP funds have been reluctant to lend.

“Right now there is no new lending, and without new lending it’s going to be difficult for the economy to recover( TRUE ),” Roger Altman, founder and chief executive officer of boutique investment bank Evercore Partners Inc. and an assistant Treasury secretary in the Carter administration, said in a Dec. 29 interview with Bloomberg TV.

Stifling Innovation

A report released Dec. 2 by the Government Accountability Office in Washington questioned whether Treasury is policing the cascade of federal money closely enough.

“Although Treasury has said that it expects the institutions to increase the flow of credit,” the report said the department “has not yet determined whether it will impose reporting requirements on the participating financial institutions( AS I SAID, TARP WILL BE HARD TO ASSESS. ).”

David John, a senior fellow with the Heritage Foundation, a public policy and research group in Washington, said it was inappropriate for the government to demand policy changes from the banks and that doing so would be counterproductive because it would stifle innovation( WE'RE IN A CALLING RUN. ). Instead, he said banks should use the capital to recover stability and then be forced to return the taxpayer funds.( I UNDERSTAND, BUT THAT WASN'T THE DEAL. )

“Bureaucrats take no risks, they have no ideas( SILLY ),” John said. “If this recoups a profit for the taxpayer, great, but a slight loss would be acceptable. I don’t see it as a long-term value to be an activist shareholder( I AGREE ).”

‘No Road Map’

There are no partisan lines separating those who favor a passive investment strategy and those who want the government to play a more active role.

“I do not see the Treasury or the Fed as active investors in the banks, and it would be a mistake if they were,” said Martin N. Baily, a chairman of the Council of Economic Advisers in the Clinton administration and now a senior fellow at the Washington-based Brookings Institution. “The goal is to stabilize the financial sector and to be mindful of the costs to taxpayers. Perhaps there will be positive returns on these investments, but not necessarily( I UNDERSTAND, BUT DON'T AGREE. WE COULD HAVE SPENT THE MONEY IN BETTER WAYS THEN. ).”

Bruce Josten, executive vice president for governmental affairs at the U.S. Chamber of Commerce, a pro-business group, said taxpayers had a right to expect a loosening of credit by the banks, though the government “shouldn’t micromanage them.”( FINE. LEND. )

“I don’t think there’s one good answer here,” Josten said. “There’s no paint-by-the-numbers road map. It’s all improvised.”( THE SWEDISH PLAN IS A ROAD MAP. )

For Garten, the unprecedented nature and scale of the problems means that policy makers and taxpayers will have to get used to a new way of thinking as long as the crisis lasts.

“There’s a philosophical conflict in the American mind( SOME PEOPLE ARE BOTHERED. MOST AREN'T ) because we’re just not used to this level of( OBVIOUS ) intervention,” Garten said. “That hang-up is not compatible with the depth of this crisis( I AGREE ).”

This was all predictable from the fact that TARP was a HYBRID PLAN with the government and the banks having different objectives. The free market worries are hilarious. If anything, a Hybrid Plan will be far harder and costlier to exit in the long run. Also, if you believe in the efficacy of FDIC Insurance, then some government intervention to stop a Calling Run is no more intrusive than that. The free market as propounded by some is a theory or goal, not a reality. The inability to grasp how our system works is amusing but sad.

“The markets got awfully shook up when Paulson spoke,”

This story from Bloomberg merely illustrates a few themes that I've been harping on:

"Paulson may ask Congress for the remaining $350 billion from the Troubled Asset Relief Program as he puts together plans to boost consumer credit. Treasury and Federal Reserve officials are working on an effort to buttress the market for securities backed by auto, student and credit-card loans, Paulson said last week. He’s also assembling an office to address mortgage foreclosures. "

I've been arguing that TARP was sold as a Credit Stimulus Plan without the Stimulus, which would be lending. Sec. Paulson said that wasn't the point of TARP, but the point was rather to buttress up the financial system. In doing so, he managed to drop any value that there was in the CDO market and further calcify it, one effect of which is the bailout of Citi. He also managed to terrify everyone that banks might not lend until the downturn was beginning an upturn. I can understand the banks feeling this way, but not accepting the TARP money as well knowing what lawmakers wanted them to do with it. This is a case of very bad faith on the part of the banks.
It also seemed that he was leaving the mortgage problem to the FDIC.

If you read the above statement, you'll find that it's an about face. Some people will blame Paulson, and I'll be one of them, for a dizzying array of positions. However, in my opinion, this "any way the wind blows" policy making is built into TARP. TARP is a Hybrid Plan, and, if there are any merits to Hybrid Plans, and I, for one, don't think that there are, it's that you can expect to feel like you're on a Tilt-a-Whirl when you're in them, and you'll have the freeing feeling of constantly changing your mind and holding opposing positions while you're in them. It's quite a ride, almost always expensive and inefficient. That doesn't mean that no good can flow from them, just that it's not cost effective or easy to get out of. Hybrid Plans have a bad habit of morphing on indefinitely, often taking on other acronyms and guises.

"Paulson’s pivot is the latest in a series of changes."

Let's go along for the ride. Whee.

1) "He won authorization from Congress in July to aid mortgage companies Fannie Mae and Freddie Mac by saying he doubted he would need to use it, seven weeks before doing exactly that. " ( Well a doubt isn't a certainty )
2) "Two weeks ago he abandoned the TARP’s original intent of buying bad bank assets in favor of direct capital injections. "
3) "The Citigroup rescue came five days after Paulson told the House Financial Services Committee that Treasury and the Fed’s actions had resulted in “a significantly more stable banking system where the failure of a systemically relevant institution is no longer a pressing concern rattling the markets.”

This isn't even the whole list. What has the effect been?

“The markets got awfully shook up when Paulson spoke,” said Fred Dickson director of research at DA Davidson & Co. in Lake Oswego, Oregon. “The credibility right now in terms of Treasury and the administration is part of the problem. We’re not at all past concerns about financial institutions".

“You have systemic fear everywhere,” said David Winters, who manages $3 billion as chief executive officer of Wintergreen Advisers LLC in Mountain Lakes, New Jersey. “People don’t know what to believe” and “confidence is completely drained out of the system.”

"President-elect Barack Obama today said at a press conference that there has been “confusion on what the overall direction might be” of the Bush administration’s plans for dealing with the financial crisis. "

He's been to financial panic, what a pryomaniac is to a fire. A Panicmaniac. Would things have been worse without the Hybrid? Yes, because there was no Plan B, which would have meant a "Go directly to meltdown card, and please don't stop at "Go" ". On the other hand, this whole mess of lobbying, unclear and unspecific legislation, reeling markets, calcified markets, conflict of interest, finger-pointing, etc., is a function of choosing a Hybrid Plan.

Here's a funny line from President Obama:

"In announcing his nomination of New York Federal Reserve Bank President Timothy Geithner to succeed Paulson as Treasury chief, Obama also pledged to “honor the commitments” of the outgoing teams, suggesting he has no plans to overhaul the implementation of TARP funds committed so far. "

Paulson can drive the car in any direction he wants, but President Obama needs to stick to the road. What's wrong with this picture?

"Paulson, with less than two month left in his tenure, spent much of last week defending his actions."

Here's where I feel sorry for him. He might have to spend his whole life doing this, and know that some history books will be written featuring him as a disaster. It's not all his fault by any means. If anything, he's one of the only Bush people who's intelligent enough to try and change course. In this administration, he a breath of fresh air.

“Some have chosen to scapegoat the Lehman failure as the cause of the deepening crisis in September, as opposed to a symptom,” he said. “That is at best naïve, and at worst disingenuous.”

He's terribly wrong about this, and I'd gain a lot of respect for him if he'd admit it.

"Which is why the chancellor will have to announce that taxes are going to rise at a specified date in the future"

Matt Yglesias was bothered by the following comment by Matt Miller:

"Matt Miller writes the deficit hawk’s case for running a giant short-term deficit but says it would be worth thinking short-term about what can be done in terms of the long-term deficit:

Bob Litan of the Brookings Institution suggests building such triggers into Obama’s blueprint from the start. Once unemployment gets back beneath 6%, for example, we could require a supermajority vote in Congress to run deficits higher than, say, 2% or 3% of GDP (by comparison, the trillion dollar figure will push us toward 7%, an all-time high).

Yes, promises like this can be broken. But given the extraordinary circumstances, writing this kind of future restraint into law would tell world markets that we know the debt spree has to end. Obama could also set up a bipartisan commission on Social Security and Medicare with a view to building consensus for action in a second term, by which time the current crisis will, with luck, be a fading memory.

This first idea seems problematic. If you have a weak economy and a huge deficit that succeeds in strengthening the economy, you don’t really want to pivot on a dime and implement a catastrophically sudden fiscal contraction. You’d probably have to change it to be more of a sliding-scale thingy."

I made the following comment:

1. Don the libertarian Democrat Says:
   November 20th, 2008 at 5:29 pm

   “Yes, promises like this can be broken. But given the extraordinary circumstances, writing this kind of future restraint into law would tell world markets that we know the debt spree has to end.’

   The point is to let investors know that we’re not going to print money to get out of this, or default. In other words, at some point, we’re going to either raise taxes and/or cut spending, to decrease our debt/deficit, which could get very expensive for us to service in the future, among other looming problems.

   Japan, for instance, in order to deal with this problem, is considering writing a tax increase into its stimulus. The problem with this is that some worry that instead of spending money, some people will save money against future tax increases and lower income. In this environment, that might not matter, and the Japanese might take saving more seriously than we do. But the concern is the same.

Here's a post on BBC by Peston that deals with the same problem in Britain:

"So part of the hole in the government's revenues to be unveiled after the weekend should be seen as permanent.

Which is why the chancellor will have to announce that taxes are going to rise at a specified date in the future, to fill the structural hole in the public finances.

To be clear, I am not talking about immediate tax rises.

Quite the reverse.

I am certain that on Monday the chancellor will also announce a significant package of measures to stimulate the economy.

These will include tax cuts and spending increases funded by extra borrowing, equivalent perhaps to as much as 2% of GDP.

And the bulk of the tax cuts will be directed at those on lowest incomes, partly because they have the highest propensity to spend - for the good of the economy - and also for reasons of social justice.

Alistair Darling will describe such a giveaway as vital to lessen the sharp and painful economic contraction we're experiencing.

But he will also announce deferred tax rises and deferred cuts in public spending - to kick in when the economy has recovered a bit.

When would that be? Maybe 2010, maybe 2011.
If he fails to announce such debt-reduction measures, there could be very strong downward pressure on sterling and a corresponding damaging rise in the cost for the government of borrowing.

And, to be clear, the incremental sums he'll announce he has to borrow over the next couple of years will be colossal - equivalent to at least 8% of GDP, possibly more, or well over £110bn per annum.

You have to go back to at least the 1970's for a time when public borrowing was spiralling up at such an alarming rate.

Such a rise in public borrowing would be unsustainable.

Which is why, to repeat, there will have to be deferred tax rises and deferred public spending reductions inked into the public accounts and announced by the chancellor.

All of that is inevitable.

So which taxes will rise?

Well my prediction is VAT.

For the sake of transparency I should say that I don't know that there will be a VAT rise.

But a deferred increase from 17.5% to 22.5% in the VAT rate would raise around £20bn.

And it's one of the few future tax rises which might actually stimulate a bit of increased economic activity ahead of its implementation, rather than encouraging us to save

To use the economic cliche of the moment, it would give us all quite a "nudge" to spend now, before the swingeing increase in VAT would kick in. "

So, because the government is going to spend money on a stimulus plan, cut taxes, borrow money, and thereby increase the deficit and debt, the government is announcing a tax increase in the future. This is to assure investors that they won't default or print money, making investor's investments either worthless or worth less.

But, notice the VAT. Peston is guessing a rise in the sales tax. This gives people a nudge to shop now, helping to bring the economy out of the downturn. On the other hand, an increase in income taxes could lead people to save against the future loss in income, thereby prolonging the downturn.

We don't have a VAT here, so what other taxes could we cut that would have a similar effect? Increasing sales taxes, by the way, as some local governments are doing, doesn't seem wise in a downturn.

"If bankers do not start lending of their own accord, governments will force them to."

I was not happy with TARP, once transformed from buying toxic assets, being sold as a credit stimulus plan, and then turning out not to be one. But I never believed that so many people in so many countries would be going through the same thing and feeling the same way. Once having received the money, the banks should be expected to lend. Willem Buiter wants to penalize banks if they don't, and the FT isn't too happy about this problem either:

"Bankers must start lending – or else

Published: November 21 2008 20:00 | Last updated: November 21 2008 20:00

“Neither a borrower nor a lender be” was not intended as advice for bankers. Someone should tell them. The purpose of the recent round of recapitalisations was to strengthen banks so that they could continue lending during a global downturn. But banks are not doing so. They must. They are vital utilities – a modern economy cannot function without credit. If bankers do not start lending of their own accord, governments will force them to.

Banks around the world have been recapitalised. Governments bought shares in them, increasing the banks’ risk-capital buffers. The banks were injected with enough capital not only to make up for the losses they were expected to make in the downturn, but also to allow them to expand their lending without the capital cushion becoming too small relative to the banks’ assets. Newly fortified, banks were supposed to become trustworthy borrowers and confident lenders."

This is my point about TARP being a credit stimulus plan. Only we're talking about Britain, as well. It's like a virus.

"Expecting further losses, however, they have clammed up. They are wary of extending their balance sheets further. This is, in part, because they are still traumatised after a near-death experience. Many banks have also seen their top management decapitated. Finally, investors and banks have become so risk-averse that even government guarantees on lending are not convincing. Despite being underwritten by the US government, perceptions of the risk on Citigroup’s debts have remained stubbornly high".

As Peston showed, this hoarding strategy, cleaning up your books, waiting for sentiment to turn, makes sense from the point of view of the banks. However, they were given the money to lend it. So, as Peston says, there's a conflict. But I predicted this from the first. The banks will lobby and do what they feel they need to in a hybrid plan. That's a major reason that they don't work and cost so much. There's an inherent tension between the banks and the interests of the taxpayers. That's why I favored the Swedish Plan. It wasn't because I wanted the government running banks. But, please, Political Economy is having the knowledge and sense to understand how the real world is functioning. This tension was built in to TARP, and the other hybrids in other countries. I've just showed you Britain, so I'll try and document others.

"Governments can do more to support lending. They can reassure markets that capital ratios are supposed to fall in the downturn and that they stand behind the banks. Finance ministries around the world can recapitalise further. Central banks can expand their lender of last resort functions.

If evidence emerges that banks are not lending because they are hoarding cash to pay off the expensive preference shares taken by governments, the rescue can be restructured. One option would be to give governments more control of the banks; another would be to reduce the short-term costs of the capital.

But even if governments ensure that lenders are solvent and liquid, it could still be rational for each bank not to lend. Banks want safety in numbers when it comes to lending. But a lack of credit would force sound companies under because of a working capital squeeze. Faced with this prospect, governments will have no choice but to step in.

Politicians may attempt to lend directly, taking on credit risk to stimulate certain categories of lending and insurance. But banks, which have always been dependent on the largesse of taxpayers, could be forced to adopt central targets for new lending. This would overcome the problem of no institution wishing to be the first-mover. And banks would have little choice but to obey; if they are unco-operative, they could end up in public ownership."

So, governments can:

1) Explain to creditors that a bank's capital falls during a downturn ( Good luck )

2) Reassure that they stand behind the banks ( Good luck, if this just means jawboning )

3) Give capital to the banks if they need more. Hopefully this means after have loaned a bunch.

4) Make borrowing from Fed cheaper ( Aren't they doing that? )

5) Threaten them with being taken over ( I'm sure they're scared )

I say just take them over and be done with it. Then take them private ASAP.

"The goal of the TARP was primarily to avert financial meltdown and chaos in the credit markets, not to spur massive increases in bank lending"

James Suroweicki with two good posts:

"Tyler Cowen, I assume, opposes any bailout. But he articulated perhaps the best argument for it a couple weeks ago in The New York Times, when he wrote:

Rebuilding confidence might seem a small matter, but it is not. The truth is this: America is a wonderful and magnanimous nation when it is a winner, but Americans are not used to losing and Americans are not used to panic.

Often we respond to negative events badly, so we need to be especially careful when we are in a losing or risky position.

Very bad events can cause a panic among the citizenry or its leaders, which translates into subsequent bad decisions.

It’s important that policymakers and pundits not fool themselves. Americans are not prepared for G.M. and Ford to go bankrupt. At this point, their failures would be “very bad events,” and they would cause people to panic. If you’re ideologically opposed to the very idea of bailing out private corporations, then opposing this bailout makes sense. But if you’re making a risk-reward calculation, then it doesn’t."

I agree, and consider this an argument based on Politics and Political Economy. It's a good one. Nevertheless, I have articulated conditions for this loan.

Another post:

"Testifying before Congress on Friday, Assistant Treasury Secretary Neel Kashkari, the man in charge of the TARP, said of the $700 billion plan: "It's not a stimulus, it's not an economic growth plan. It's an economic stabilization plan." Unlike Felix Salmon, I think Kashkari's distinction between stabilization and stimulus is actually a useful, and accurate, one. The goal of the TARP was primarily to avert financial meltdown and chaos in the credit markets, not to spur massive increases in bank lending. The hope was, and is, that doing the first would help with the second, but the real problem that had to be dealt with was bolstering the markets' confidence in the health of the country's major financial institutions. (As I've said before, I'm the only person who still thinks that the original TARP plan to buy toxic assets would have helped do this, if it had been done in combination with recapitalization.)

But in arguing that the goal of the TARP is stabilization rather than stimulus, Kashakari actually inadvertently helped explain why it would be reasonable to use TARP funds to bail out G.M., as Democrats advocate. The Bush administration opposes doing so, because, it argues, Congress intended the bill solely "deal with what is an ongoing credit crisis in our financial sector." If the administration thinks that a G.M. bankruptcy would not significantly exacerbate the credit crisis, it's simply not paying attention to what people in the equity and credit markets are saying. In fact, from the point of view of stabilizing the markets and reducing people's risk aversion, giving G.M. and Ford $50 billion is probably the best investment the government could make right now."

So, why don't I support TARP, even as described? Because I believe that a credit stimulus plan would have been a better use of the money and, quite frankly, be a better economic stabilization plan. The Swedish Plan would have been even better, for reasons I've argued elsewhere. So, one can agree that TARP has had some success, and yet still be an awful plan. In the case of the Big 3, I want the conditions earlier enunciated to be met, or no deal. I believe that Suroweicki has a much lower standard of acceptance than I do.

"Lawmakers unhappy with the plan are finding they can do little else but jawbone banks to lend"

Barney Frank agrees with me. From the WSJ:

"Frank Says Banks Should Just Use Government Funds for Lending

House Financial Services Committee Chairman Barney Frank asserted that a number of financial firms were “distorting” the financial rescue legislation by not using government capital exclusively to boost lending.

Frank

“Any use of these funds for any purpose other than lending — for bonuses, for severance pay, for dividends, for acquisitions of other institutions, etc. — is a violation of the terms of the Act,” Frank (D., Mass.) said in a statement Friday.





But this:

“Maybe if we’d have 13 weeks instead of 13 days we would’ve written that bill with even more detail,” Senate Banking Committee Chairman Christopher Dodd (D., Conn.) said Thursday."

Come on. I saw this problem from the very beginning on my blog.

"However, they aren’t required to shut off dividends to shareholders. And there are no requirements that banks use the funds to lend, rather than bolster their balance sheets or make acquisitions. Indeed, Treasury supports banks using the funds to buy weaker rivals.

Lawmakers unhappy with the plan are finding they can do little else but jawbone banks to lend. The financial rescue legislation that granted Treasury authority for the bank capital program says little about the use of any government funds, other than placing some curbs on executive pay.

The House Financial Services Committee will hold oversight hearings on Nov. 12 and Nov. 18 on TARP. Frank warned, “It is very important if congressional and public support for this program is to continue that we receive assurances at those hearings that the money being advanced will be used only for relending and for no other purpose.” –Jessica Holzer"

Good work Jessica. How well does jawboning work? Why pass laws when we can jawbone? Holy mackerel.

"This figure shows the money multiplier peaked the week of 6/4/08 and begin a sharp descent in late August."

Peter Dorman on EconoSpeak about TARP, the credit stimulus plan without a stimulus:

Peter Dorman said...

It's actually worse than this, pgl. The Fed, by upping the rate it pays for these excess reserves, is encouraging banks to not lend in order to finance its rescue agenda. That is, credit is being constrained today in order to repair institutions in the hope they will provide credit tomorrow. But how long is tomorrow? How far will the economy drop in the meantime? How will this drop affect lenders' balance sheets and push tomorrow further out into the future?

I am coming to think that the entire strategy, even if diligently pursued, is misguided.

October 29, 2008 1:16 PM

Yep.

“This is the people’s money. They’re giving it out with no rules.”

It doesn't get clearer than this that TARP is off track. Via the NY Times:

"Bank of America said in a statement that the money “will add to our capital, which will increase our capacity to expand our balance sheet and make more loans.” It did not say if it was willing to increase its lending.

Indeed, observers point to the growing well of bank losses, deeper by the quarter, as reason to question whether the government funding will be used as a financial Band-Aid, instead of an engine to move forward.

“It is the government’s responsibility to set the terms and conditions on this money,” said David M. Walker, the former federal comptroller general and now president of the Peter G. Peterson Foundation. “This is the people’s money. They’re giving it out with no rules.”

Bank executives, meanwhile, said on conference calls this week that it was premature to discuss their plans. "

A credit stimulus package without the stimulus. Perfect.

Lobbying Already?

Yves Smith on Naked Capitalism with bad news:

"Bankers and industry experts said that aside from a handful of token restrictions, the capital injections more closely resemble a blank check." from the WSJ

Here's Smith:

"In fact, the Journal authors nailed it when they used the word "token." The banks will probably put a few measures in place so as not to embarrass their new sugar daddy. But with no formal conditions set at the time of the capital injection, the terms generous compared to recent private sector financings, and only (at most) promises made to a Treasury secretary with a bit more than three months left in office, the government assistance of early this week was as close as you get in adult life to free money. "

This would seem to defeat the purpose of the credit stimulus, and only help the banks by improving their overall situation. Did I mention the problem of lobbying?