why pressuring banks to lend could backfire

From Barbara Kiviat:

"Why the banks should be hoarding their TARP money, Part II

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A couple weeks back, Justin liked Jack Guttentag's explanation of why banks receiving TARP money shouldn't be made to immediately lend it out. This morning I am equally impressed with Bert Ely's opinion piece in the WSJ about why pressuring banks to lend could backfire. Among the points that bear repeating:

Lost in too many discussions of the financial sector is that banks and other depository institutions account for only 22% of the credit supplied to the U.S. economy (down from 40% in 1982). "Shadow banking" -- notably asset securitization and money-market mutual funds -- now supplies 33% (up from 14%). Insurance companies, other financial intermediaries, nonfinancial firms and the rest of the world provide the balance.

As far as commercial banks go, Federal Reserve data released last week show that their lending increased 2.36% during the last quarter of 2008. For all of 2008, commercial-bank lending rose by $386 billion, or 5.63%, even as the economy slid into recession.

Also this:

The drop in stock-market and house prices has made millions of families feel poorer and led them to save more than in recent years. It has also encouraged them (especially Baby Boomers approaching retirement) to pay off debt. They don't need more debt.

More broadly, many of the most creditworthy neither need to nor want to borrow right now. Richard Davis, CEO of U.S. Bancorp, recently said that he is seeing the demand for loans diminish at his and other banks "from people and businesses spending less and traveling less and watching their nickels and dimes."

Lenders moreover have tightened lending standards, correcting an excessive laxness that contributed to our financial mess... And contrary to the "lend more" message broadcast from inside the Washington Beltway, bank examiners are criticizing weak loans and forcing banks to tighten lending standards. Bankers are caught in a vise between politicians and examiners.

On principle alone, in a head-to-head between politicians and bank examiners, I'm going to hope the examiners win.

Barbara!"

Me:

1. donthelibertariandemocrat Says:
   Monday, February 2, 2009 at 2:27 pm

   "Should the Congress choose to undertake fiscal action, certain design principles may be helpful. To best achieve its goals, any fiscal package should be structured so that its peak effects on aggregate spending and economic activity are felt when they are most needed, namely, during the period in which economic activity would otherwise be expected to be weak." Bernanke

   http://www.federalreserve.gov/newsevents/testimony/bernanke20081020a.htm

   So, a stimulus should occur in the downturn, not wait until it's over. After TARP shifted gears, it was sold as a Credit Stimulus Plan. Even the tax changes were sold that way:

   http://economix.blogs.nytimes.com/2008/10/04/will-paulsons-two-plans-unplug-the-liquidity-trap/

   Some of us said this wouldn't work because the plan is a hybrid. The interest's of the government and banks aren't the same. One answers to taxpayers, the other answers to shareholders. One wants the banks to loan money, the other wants them to hoard money. But it's worse than that, because, with the money, taxpayers became shareholders as well. In other words, shell shocked and barely competent bankers were told to loan money as fast as they can, but make sure not to lose any more money. This had to be one of the more oddly designed plans in recent years. So odd, that the GAO couldn't even figure out how to assess it, another problem some of us warned about.

   After the credit stimulus went nowhere, others rationales were offered. However, especially after Iraq, many of us are tired of an endless cascade of shifting rationales.

   For those of us who wanted a version of the Swedish Plan ( And that doesn't mean following them to the letter, and even given our banks Swedish names ), this entire process is a nightmare. Even now, it looks like the ship keeps trying to head towards nationalization, only to be waylaid by another costly and messy detour. I guess since everybody is now too poor to qualify for a loan, we might at least be given an idea of what could change that situation, besides giving money to banks that won't help us get there.

A surprisingly common criticism of the TARP is that it didn't require banks receiving bailout money to lend to small businesses and consumers.

From the Economics Of Contempt:

"Why why shouldn't force banks to lend

A surprisingly common criticism of the TARP is that it didn't require banks receiving bailout money to lend to small businesses and consumers. Joe Nocera of the NYT penned a whole column about "the dirty little secret of the banking industry," which was that "it has no intention of using the money to make new loans."

Elizabeth Warren's TARP Oversight Panel has also criticized the Treasury for not requiring banks to lend money. For example, the Panel's second report stated:

If, as Treasury has stated, the goal of capital infusions was to increase consumer and small businesslending, why were funds not concentrated among businesses with substantial small business and consumer lending or authorized only when a financial institution presented a business plan to use the funds for small business or consumer lending?

The purpose of the equity injections was to recapitalize the banks, which were (and still are) woefully undercapitalized. Forcing them to immediately turn around and make more risky loans—and small business and consumer loans are historically risky loans—is a really stupid idea.

But don't take it from me. Take it from Richard Caballero of MIT, Anil Kashyap of Chicago, and Takeo Hoshi of UC San Diego. Their paper in the December 2008 issue of the American Economic Review, "Zombie Lending and Depressed Restructuring in Japan," examines "the role that misdirected bank lending played in prolonging the Japanese macroeconomic stagnation that began in the early 1990s." The paper is behind a firewall, but there's a draft version (which might differ slightly from the final version) available here. Since it's hard to understate the paper's relevance to the current criticisms of TARP, I quote at length:

This paper explores the role that misdirected bank lending played in prolonging the Japanese macroeconomic stagnation that began in the early 1990s. The investigation focuses on the widespread practice of Japanese banks of continuing to lend to otherwise insolvent firms. We document the prevalence of this forbearance lending and show its distorting effects on healthy firms that were competing with the impaired firms.
...
Aside from a couple of crisis periods when regulators were forced to recognize a few insolvencies and temporarily nationalize the offending banks, the banks were surprisingly unconstrained by the regulators.

The one exception is that banks had to comply (or appear to comply) with the international standards governing their minimum level of capital (the so-called Basle capital standards). This meant that when banks wanted to call in a nonperforming loan, they were likely to have to write off existing capital, which in turn pushed them up against the minimum capital levels. The fear of falling below the capital standards led many banks to continue to extend credit to insolvent borrowers, gambling that somehow these firms would recover or that the government would bail them out. Failing to roll over the loans also would have sparked public criticism that banks were worsening the recession by denying credit to needy corporations. Indeed, the government also encouraged the banks to increase their lending to small and medium-sized firms to ease the apparent “credit crunch,” especially after 1998. The continued financing, or “evergreening,” can therefore be seen as a rational response by the banks to these various pressures.
...
By keeping these unprofitable borrowers (which we call “zombies”) alive, the banks allowed them to distort competition throughout the rest of the economy. The zombies’ distortions came in many ways, including depressing market prices for their products, raising market wages by hanging on to the workers whose productivity at the current firms declined, and, more generally, congesting the markets where they participated. Effectively, the growing government liability that came from guaranteeing the deposits of banks that supported the zombies served as a very inefficient program to sustain employment. Thus, the normal competitive outcome whereby the zombies would shed workers and lose market share was thwarted. More importantly, the low prices and high wages reduce the profits and collateral that new and more productive firms could generate, thereby discouraging their entry and investment. Therefore, even solvent banks saw no particularly good lending opportunities in Japan.
...
We find that investment and employment growth for healthy firms falls as the percentage of zombies in their industry rises. Moreover, the gap in productivity between zombie and non-zombie firms rises as the percentage of zombies rises. These findings are consistent with the predictions that zombies crowd the market and that the congestion has real effects on the healthy firms in the economy. Simple extrapolations using our regression coefficients suggest that cumulative size of the distortions (in terms of investment, or employment) is substantial. For instance, compared with the hypothetical case where the prevalence of zombies in the 1990s remained at the historical average instead of rising, we find the investment was depressed between 4 and 36 percent per year (depending on the industry considered)."

And moi:

Don said...

I just read a Ricardo Caballero post in the FT where he says that we should get rid of capital standards:

http://blogs.ft.com/wolfforum/2009/01/a-capital-less-financial-system/#comments

"The question then is whether it is feasible to run a (nearly) capital-less financial system until panic subsides. If it is, then a solution to the financial crisis is in sight since it would free up trillions of dollars of hard to raise funds, covering more than even the most extreme estimate of losses."

I'm assuming that he means that doing so will allow banks to lend instead of hoarding cash for a call. But I'll ask the question that I posted him before I read that comments were confined to experts: How does this differ from AIG? We gave AIG money so that they could weather the storm and not sell their assets at a huge loss now, but wait and sell later. The FT had Liddy saying just this in November. But what's the difference in lending them money, which pays interest, and simply cutting their capital requirements and guaranteeing their losses, which we charge a nominal insurance fee on ?

As to your main point, I'm bothered by how TARP was sold, and then changed. If recapitalizing the banks without the money being deployed was the plan, then it should have been sold that way. As an average citizen, that's not how it was sold to me. I think that many citizens, like myself, are a little battered by the arguments used to sell us a plan being one thing, and then, once sold, the plans are changed to something else.

Don the libertarian Democrat

“We see TARP as an insurance policy,” he said.

From the NY Times:

"Bailout Is a Windfall to Bankers, if Not to Borrowers

By MIKE MCINTIRE

At the Palm Beach Ritz-Carlton last November, John C. Hope III, the chairman of Whitney National Bank in New Orleans, stood before a ballroom full of Wall Street analysts and explained how his bank intended to use its $300 million in federal bailout money.

“Make more loans?” Mr. Hope said. “We’re not going to change our business model or our credit policies to accommodate the needs of the public sector as they see it to have us make more loans.” ( THEN DON'T TAKE THE MONEY. THIS IS WHY WE MUST NATIONALIZE THE BANKS. A HYBRID PLAN IS A DISASTER. AS I'VE SAID, THE INTEREST'S OF THE GOVERNMENT AND BANKS AREN'T THE SAME. )

As the incoming Obama administration decides how to fix the economy, the troubles of the banking system have become particularly vexing.

Congress approved the $700 billion rescue plan with the idea that banks would help struggling borrowers and increase lending to stimulate the economy, and many lawmakers want to know how the first half of that money has been spent before approving the second half. But many banks that have received bailout money so far are reluctant to lend, worrying that if new loans go bad, they will be in worse shape if the economy deteriorates.

Indeed, as mounting losses at major banks like Citigroup and Bank of America in the last week have underscored, regulators are still searching for ways to stabilize the banking system. The Obama administration could be forced early on to come up with a systemic solution, getting bad loans off balance sheets as a way to encourage banks to begin lending, which most economists say is essential to get businesses and consumers spending again.( WE NEED TO STOP THE CALLING RUN WHICH IS BURNING AWAY THIS CASH )

Individually, banks that received some of the first $350 billion from the Treasury’s Troubled Asset Relief Program, or TARP, have offered few public details about how they plan to spend the money, and they are not required to disclose what they do with it. But in conversations behind closed doors with investment analysts, some bankers have been candid about their intentions.

Most of the banks that received the money are far smaller than behemoths like Citigroup or Bank of America. A review of investor presentations and conference calls by executives of some two dozen banks around the country found that few cited lending as a priority. An overwhelming majority saw the bailout program as a no-strings-attached windfall that could be used to pay down debt, acquire other businesses or invest for the future.( A DISGRACE )

Speaking at the FBR Capital Markets conference in New York in December, Walter M. Pressey, president of Boston Private Wealth Management, a healthy bank with a mostly affluent clientele, said there were no immediate plans to do much with the $154 million it received from the Treasury.

“With that capital in hand, not only do we feel comfortable that we can ride out the recession,” he said, “but we also feel that we’ll be in a position to take advantage of opportunities that present themselves once this recession is sorted out.”( A DISGRACE )

The bankers’ comments, while representing only a random sampling of the more than 200 financial institutions that have received TARP money so far, underscore a growing gulf between public expectations for how the $700 billion should be used and the decisions being made by many of the institutions that have taken part. The program does not dictate what banks should do with the money.( I SAID THIS IN OCTOBER )

The loose requirements in the original plan have contributed to confusion over what the Treasury intended when it abruptly shelved its first proposal — to buy up bad mortgages — in favor of making direct investments in individual banks in return for preferred shares of stock.

The Treasury secretary, Henry M. Paulson Jr., said in October that banks should “deploy, not hoard”( THIS IS WHY I CAN'T USE "DEPLOY" ANY MORE. ) the money to build confidence and increase lending. He added: “We expect all participating banks to continue to strengthen their efforts to help struggling homeowners who can afford their homes avoid foreclosure.”

But a Congressional oversight panel reported on Jan. 9 that it found no evidence the bailout program had been used to prevent foreclosures, raising questions about whether the Treasury has complied with the law’s requirement that it develop a “plan that seeks to maximize assistance for homeowners.”( NO )

The report concluded that the Treasury’s top priority seemed to be to “stabilize financial markets” by simply giving healthy banks more money and letting them decide how best to use it. The report also said it was not clear how giving billions to banks “advances both the goal of financial stability and the well-being of taxpayers, including homeowners threatened by foreclosure, people losing their jobs, and families unable to pay their credit cards.”( A DISGRACE. ALL PREDICTED. )

For the banks, fearful that the economic downturn could deepen and wary of risking additional losses, the question of what to do with the bailout money comes down to self-preservation.

Mark Fitzgibbon, research director at Sandler O’Neill & Partners, which sponsored the Palm Beach conference, said banks seemed to be allocating the bailout money for four general purposes: increased lending, absorbing losses, bolstering capital and “opportunistic acquisitions.” He said those approaches made sense from a business perspective, even though they might not conform to popular expectations( THE TAXPAYER'S MONEY ) that the money would be immediately lent to consumers.

“For the banking industry, this isn’t a sprint, this is a marathon,” Mr. Fitzgibbon said. “I think over time there will be pressure to lend that capital out and get a return for their shareholders. But they’re not going to rush out and lend all that money tomorrow. If they did, they could lose it.”( THEN GIVE IT BACK )

For City National Bank in Los Angeles, the Treasury money “really doesn’t change our perspective about doing things( THEN YOU DIDN'T NEED IT ),” said Christopher J. Carey, the bank’s chief financial officer, addressing the BancAnalysts Association of Boston Conference in November. He said that his bank would like to use it for lending and acquisitions but that the decision would depend on the economy.

“Adding $400 million in capital gives us a chance to really have a totally fortressed balance sheet in case things get a lot worse than we think,” Mr. Carey said. “And if they don’t, we may end up just paying it back a little bit earlier.”( GEE. THANKS. )

In addition to wanting more lending, members of Congress have said TARP should not be used to fuel mergers and acquisitions, although Treasury officials say the financial system would be strengthened if healthy banks absorbed weaker ones. To that extent, bailout money has been useful for improving capital( FOR STOPPING CALLING RUNS ) ratios — the amount of money available to absorb losses — for banks that merge.

On Friday, Bank of America said it would receive $20 billion more from the Treasury to help it digest losses it took on by acquiring Merrill Lynch, a process begun in September.

At least seven banks that received TARP money have since bought other companies, including one that had been encouraged to do so by federal regulators. That one, PNC Financial Services, took $7.7 billion from the Treasury and promptly acquired the struggling National City Bank for $5.2 billion in stock and $384 million in cash.

Among the others, PlainsCapital Bank of Dallas announced in November, not long after the bailout program began, that it planned to merge with a healthy investment bank, First Southwest. PlainsCapital received $88 million from the Treasury on Dec. 19, and the all-stock merger was completed two weeks later. PlainsCapital’s chairman, Alan B. White, insisted in an interview that the two events were not connected.

He said the bank had not yet decided what to do with its bailout money, which he called “opportunity capital.” Increased lending would be a priority, said Mr. White, who did not rule out using it for other acquisitions, adding that when regulators invited PlainsCapital to apply for federal dollars, there were no conditions attached. ( WHAT A DISGRACE )

“They didn’t tell me I had to do anything particular with it,” he said.

None of the bankers who appeared before recent investor conferences offered specific details about their intentions, but recurring themes emerged in their presentations. Two of the most often cited priorities were hanging on to the money as insurance against a prolonged recession and using it for mergers.( UNREAL )

At the Sandler O’Neill East Coast Financial Services Conference in Florida, bankers mingled with investment analysts at an ocean-front luxury hotel, where the agenda featured evening cocktails by the pool and a golf outing at a nearby country club.

During his presentation, John R. Buran, the chief executive of Flushing Financial in New York, said the government money was a way to up the “ante for acquisitions” of other companies.

“We can get $70 million in capital,” he said. “So, I would say the price of poker, so to speak, has gone up.”

For Mr. Hope, the Whitney National Bank chairman, “the main motivation for TARP” was not more loans( HE'S CRAZY ), but rather to safeguard against the “possibility things could get a lot worse.” He said Whitney would continue making loans “that we would have made with or without TARP.”

“We see TARP as an insurance policy( HERE IT IS!!! WHAT I'VE BEEN SAYING ALL ALONG. THE BANKS VIEW THE GOVERNMENT AS THEIR INSURANCE POLICY. ),” he said. “That when all this stuff is finally over, no matter how bad it gets, we’re going to be one of the remaining banks.”

This post makes it clear that the banks believe that it is the job of the government to save them in a financial crisis. You've read it now in plain English. This was their belief all along. Of course, this quote will go unnoticed. What a disgrace!!!

. “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.