TARP

8 Items to Learn About Banks and Bailouts #8

The Troubled Assets Relief Program (TARP) is nothing more than an attempt to avoid nationalization of banks that can't carry out their fiduciary responsibilities. It is an attempt to bailout the banks themselves, as well the people who run them, rather than an attempt to bailout the system and the American economy. To learn more about the details behind TARP, I highly recommend the Wikipedia article, even if it does interject politics a bit too much.

I'll leave this to the experts to tell you why this is a bad idea. You can pretty much Google around for anything Paul Krugman, Calculated Risk or Atrios has had to say about. Remember, these are economists who live in the real world. They use evidence to arrive at their opinions.

Every plan we’ve heard from Treasury amounts to the same thing — an attempt to socialize the losses while privatizing the gains. We’re going to buy up all the bad assets at premium prices; no, we’re going to offer the banks guarantees against losses; no, we’re going to let private investors buy the stuff, but offer them de facto guarantees against losses in the form of non-recourse loans.

- Paul Krugman from his blog

By offering low interest non-recourse loans, these public-private entities can pay a higher than market price for the toxic assets (since there is no downside risk). This amounts to a direct subsidy from the taxpayers to the banks. It is amazing how many different ways they've tried to recycle the same bad idea.

- Calculated Risk

The main reason for this post is to highlight how the TARP bailout funds are being carried on the books of the federal government. The cash approach used by the Bush administration overstates the best estimates of the program's costs. Since the size of the deficit and the accumulated debt will be used politically to oppose any further policy measures such as health care reform, it's important to understand the games that are being played in the presentation of the program's cost in the federal budget.

- Mark Thoma at Economist's View

Bailing out these institutions might be necessary, but bailing out executives and shareholders is not.

- Atrios at Eschaton