TARP, by all accounts but Henry Paulson’s, has been a complete clusterfuck. And yet we just had a Democratic Congress agree to shovel the other half of it out the door, with nary a question or bit of oversight.
What changed? Nothing. Same duplicitous bunch of people who ought not be trusted.
Update: Kos gives it a little more context.
tx2vadem
The government already made the mistake of letting Lehman fail. A failure that we felt close to home when Constellation Energy ceased to be a public company. This was Paulson’s, Bernanke’s, and Geithner’s attempt to stem a greater crisis on our financial markets by at least learning from that mistake. Unfortunately, it needed to be done with haste given the crisis. And the haste with which this was done does not lend itself well to sound control procedures especially when we are talking about this much money. With all of its faults, this was/is, in my opinion, still a good solution to a complex problem.
What we should recognize is basically we are trying to deal with Japan’s banking crisis in the 90s on a much larger scale in a much shorter period of time. As far as oversight goes there is not a complete lack of it. They have all those finance related committees on the Hill plus GAO.
We were at the time looking at a wholesale collapse of our finance system. Lehman wasn’t even the tip of the iceberg. Now BOA and JPMorgan that were in good shape going into this need capital injections to help support their absorption of more troubled enterprises. I mean Citigroup will shortly cease to exist (well in a form that lives up to its name anyway)! That is phenomenal!
So, are you against the idea of shoring up our financial system with government funds? Or are you seeking a different method of delivering that aid? And if it’s a different method, what could we have come up within a short amount of time to still deal with the crisis and have an appreciable impact on confidence in the banking system? What should we have done?
MB
I am not against the idea of using government money and credit to temporarily bridge the gaps created by market failures. I don’t think that gov’t funds need to shore up the *existing* financial system. The capital markets are guarded fiercely by gatekeepers who extract monopoly rents for services of questionable value. I have zero interest in preserving them. (I would, of course, prefer an orderly transition between that system and one where the value added is more accurately rewarded.)
As to oversight, I don’t mean that we need a process by which Congress approves every move. I do, however, think it not unreasonable to have a system where Treasury doesn’t lie about its motivations, rely on disproving a negative for its justification, or tell Congress/the public to screw off when someone asks where the money is going.
(Oh, and on “confidence” in the banking system – are you telling me that the Federal gov’t has an obligation to string out that circle jerk? Are you kidding me? These people have been lying to each other’s faces for years, relying on those lies to keep it going. And the public is supposed to fund a temporary extension of those lies? Please. The only reason not to call them on their bullshit immediately is that they can’t be trusted to wind it down in a responsible and orderly manner.)
tx2vadem
Questionable value, what are you talking about? Financial institutions provide an invaluable service, that is capital allocation via debt and equity. How do you do placements of large debt issuance without investment banks? How do you raise any appreciable amount of money from an IPO without a facilitator of that transaction? Questionable value seems a little over the top to me. I don’t know what you are referring to. If you mean securitization, Fannie and Freddie have been doing that for years. It is what provides liquidity to the mortgage market and what has expanded the availability of mortgages to millions of Americans. Insurance companies offer a range of products that help us mitigate risk. Mutual funds allow small investors diversity in their asset portfolios that they couldn’t achieve on their own. So, what’s questionable value?
If you just mean debt and equity issuances, New York is not the only show in town either. Capital markets have expanded around the globe and the interconnection between them is so much greater than since even the last major global meltdown. If you are doing a large issue, you can do that in any major market. And London has since surpassed New York in that regard. But the size of capital required is a natural barrier to the participants in this market.
As far as orderly transition to something else, that is what TARP is trying to achieve. Sandy Weil’s Citi is no more. The stand alone investment banks are no more. We have a mixture of public and private institutions absorbing these failed entities to affect an orderly transition through this crisis. If we were going to rely on FDIC, SIPC, and the Board of Governors at the Fed, they don’t have enough staff. And FDIC and SIPC would have been drawing similar amounts of money out of the Treasury to fund their custodianship of failed entities. Such massive amounts of failures would have utterly ruined confidence in the financial system. Would people be hording money under their mattresses? Maybe. You saw how people rushed on IndyMac went they got taken over by FDIC. It would have been more devastating than this has been.
As to a new financial system, what is that? What do you envision? I see more and maybe even better regulation of the system, but not a fundamentally different system. If anything, there are going to be fewer of those gatekeepers you mention, and a lot more banking power concentrated in a few hands especially when you are talking about players above the retail banking level. At least, this is my view of the near term.
As to confidence, our entire economy is built on belief. So, yes, I think it is the government’s job to maintain confidence in the system in situations like these. Fear and a sense of gloom amongst the masses becomes a self-fulfilling prophecy. Letting financial institutions fail would not only have had cascading effects on the industries they support, but would have also devastated public confidence in the system. If no one had confidence in the system, then there would be no banks at all. And without any banks, we would be set back over a thousand years in economic development.
Also, banks are not alone in this. They were afterall operating in a framework we set for them. It was the Federal Reserve under Greenspan that so loosened credit that caused these bubbles (first in Tech and then in housing). It was then a string of deregulation from Reagan to Bush II (including the Clinton years) that basically allowed the banks to do anything they wanted. And then its the fact that we have two major credit agencies that failed to do their job in both the cases of Enron and Worldcom, but no one has ever sought to correct their function. And if anything after Enron, despite rationality, people relied on Moody’s and S&P more. I only think the anger is misplaced if it focused solely on banks that exploited securitization and credit default swaps. I personally think that most of it should be focused at the Fed. They have an extraordinary amount of regulatory power over the financial system. They sit a top a mound of data on what goes on every day. Yet they just let this happen. They said: “Oh consumer credit is rising extraordinarily fast, oh well nothing for us to do here.” No matter what your finance system is as long as it is private, those private institutions are going to look for ways to maximize their return. If regulators are asleep at the wheel, you can’t expect individuals to collectively then act responsibly when they are in competition with each other every day. Also, the same reason they couldn’t wind it down themselves. Because in that system, individual concern supersedes a collective concern about the system.
Treasury has done a poor job in making this process transparent. But I don’t think that invalidates the necessity of the program. Congress has an oversight function though and they need to do it. And I hope given Obama’s commitment to transparency in government that what went unanswered under the Bush Administration’s management of this program will be brought to light. I think it says quite a bit that Obama lobbied for the next half of the TARP funds and selected Geithner as his Treasury pick. And he has done this given the fact that he has been surrounded by some of the brightest minds in economics and finance.
And more than this, I hope the American public takes an interest in finance. And I hope that they don’t turn their backs on financial market regulation again. People didn’t seem to learn the lesson of the S&L meltdown or the sinister hand that Citigroup had in Enron and Worldcom. And as long as the public fails to learn these lessons and fails to keep politicians on the hook for this, we’ll continue to pick up these large tabs for banking system failures until we are all broke.
MB
FWIW, Tx, I’ve not dropped this – just need a longer span of time to make sure that my response is clearly explained. In short, however, I don’t think it’s useful to string out the imaginary economy that we’ve been living in. And given what a poor job the gov’t has done in its regulatory role, I’m surprised at how appealing/justified I find the concept of massively magnified (to the point of pseudo-nationalization) public participation in the financial sector. So I want to get it right.