Originally published by Mike gamecock DeVine as Legal Editor for The Minority Report
Bank bailout bungling, commingling…but did it “work”?
The Carolina Panthers win ugly, but as 12-4 NFC South champions with a first round play-off bye, the key word in the opening phrase is “win.”
In his Inaugural address in late September, newly elected as the first President of the U.S. Economy, Treasury Secretary Henry Paulson declared that the $700B TARP bill was needed to save the banking system and unclog its new loan issuing arteries. The bill was titled the “Troubled Asset Relief Program” and Paulson’s testimony urging its passage promised funds would be used to buy up bad mortgages, but the actual terms of the bill endowed the Treasury Secretary with near plenary powers and absolute discretion to preserve the economy (as if that were possible).
Yours truly was “commissioned” at the time to cover the financial meltdown and Paulson Panic Prevention Plan, and after much research and analysis that would fill a small Caroline Kennedy size book, I came out narrowly against the passage of the TARP/PPPP.
I favored a more narrowly focused plan favored by Steve Forbes and others supply side stimulus that would have also included suspension of mark-to-market accounting rules and the repeal of the criminalization of risk-taking capitalism/small business destruction Act a/k/a Sarbanes-Oxley. My four columns written in the wake of the crisis and soon after passage of TARP from September 18-October 9 may be found here at page 4 of my archives.
Since then, Paulson actually heeded some of my advice, i.e. to take action that would maximize the likelihood that new loans would be issued rather than rescue bad mortgages. What Paulson decided to do was to buy equity in Banks, which shores up there balance sheets, which capital forms the basis for new loans at a 10/1 ration, generally.
As an aside, let be debunk the notion that the banks can or even should, report to Congress how they have spent the “TARP” money. Money is fungible. The money transferred is equity money that is part of the total capital of the banks and meant to be so. This is not a case akin to the commingling of personal versus business funds by a small business owner trying to protect assets from a divorce property settlement.
Congress should have thought of this before they passed TARP and, quite frankly, the maintenance of privacy in the banks’ private transactions helps to prevent another socialism/nationalization line.
Also, since the September 2008 Econ-911, Vice-President of the U.S. Economy/Chairman of the Federal Reserve Ben Bernanke has produced an alphabet soup of loan guarantee programs which, together with TARP’s $350B spent so far with the AIG and other “bailouts” added together, add up to possibly upwards of $7 Trillion in U.S. taxpayer funds at risk. Most experts believe most of this money is not at risk, but most do fear the inflationary effect of same once the recession ends. Bernanke, a student of the Great Depression, apparently thinks he can finesse the situation. God help us.
But back to the PPPP, which was devised because banks were unwilling to make loans to other banks in mid-September. The housing recession was in its 11th month and very few mortgages were being re-financed much less new loans issued.
Fast-forward to late December: The banking system did not fail. Bank to bank loans are being made. Mortgages are being refinanced at very high volume since a drop in interest rates in November.
Could all of the above been accomplished absent any action by government in September? No
But could it have been accomplished with a plan differing in kind and scope than the one Paulson and Bernanke have wrought? Probably.
No doubt that PPPP prevented panic in an arbitrary way.
But judging their actions by the stated goals, their way has “worked”, given a narrow definition of “worked.”
I have argued that the American people were in for hard times for the next year or two, at least, in my previous articles (see above links) and so, did not expect for investors to come off their strike due to the FED and TARP. For that, I think we will have to pay the piper for past excess and pass a supply-side stimulus plan.
Therefore, my purpose in this column is a narrow defense of Paulson and Bernanke on the accomplishment of the stated goals thus far. My own business has picked up, given that much of my work is tied to loan turn downs. For that I am thankful.
But for the un-clogged bank loan arteries to flow in greater volume after all the re-fis by sterling credit risks, investors willing and able to apply for loans will be required. For that to happen will require turning the American people loose to bail themselves out, and, unfortunately, much damage control by government gurus to undo the dame they did that led to the need for TARP/FED and from the “cure” of TARP/FED itself.
For now though, like the Panthers, they have “won ugly,” but, unlike Carolina, they don’t get a “bye.”
"One man with courage makes a majority." - Andrew Jackson