LevonP
12-13-2009, 02:09 PM
The Troubled Asset Relief Program had saved our banking system from certain collapse, but that was so yesterday. It was mocked and scorned by a Congress intent on persuading us that it had never been pals with Wall Street or big banks.
They never let poor TARP join in any Congress games.
But just when it seemed that the program’s last hope was to be a guest on Larry King to tell its side of the story, somebody discovered it still had money ... at least $200 billion, maybe more. And then just a few foggy weeks before Christmas Eve, TARP suddenly became needed and wanted, courted and loved.
Then how the Congress loved it; members shouted out with glee.
The relief program will go down in history, for sure. When the big banks, and later some little ones, looked like they were going to topple over into the pile of rubble started by Lehman Brothers and Washington Mutual, the Treasury Department came up with a scheme to prop them up — by buying their stock, by lending them billions of dollars, and by paying even more billions for what were then worthless securities, mostly mortgage-backed obligations.
Treasury’s initial plan involved re-establishing the market for these securities, but this proved more difficult and time consuming than expected. Many of these securities still sit on the Federal Reserve’s balance sheet — at this point still messy, but starting to increase, gradually, in market value. The increase in the market value of the collateral bought up during the crisis and the gradual recovery of the banks across the country does permit a reassessment of the program’s eventual cost. In fact, it makes the TARP program look less like an expensive bailout and more like a liquidity injection, which was its original intention.
The program was essentially a way to inject liquidity into a banking system sitting on a pile of securities that had zero market value — mostly collateralized mortgage obligations. It wasn’t that the underlying assets, the mortgages, had no value. They did, in fact. But because of the psychology of the collapsed real estate bubble, the market for the securities based on them had, for all practical purposes, ceased to exist.
So, in what was essentially an asset swap, the federal government purchased some of the banks’ stock, lent them some money and bought the mortgage securities — giving the banks the cash they needed to function and to re-establish their liquidity and their market credibility.
The banks are doing better and are paying back the loans now. What the mortgage-backed securities will eventually end up being worth is not known, nor is it known for sure how long it will take to sell them off without creating too much of a market downdraft.
What is clear is that the program was a success and that it will not cost as much as some initially feared, or originally budgeted.
What all of this means is that actual costs can be reduced substantially, perhaps by the $200 billion that is being discussed or, likely, even more. That is the good side. What goes wrong comes later.
To start with, the assumption that money found must equal money spent is an equation that only makes sense to Congress. It is precisely the kind of math that produces a financial sleigh ride.
Secondly, the $200 billion is not “found money” at all. And there are two good reasons for this: the return of TARP money was already factored into the budget and it was not money we ever had in the first place.
The program worked and continues to work, but the domestic and global recession that allowed liquidity to slosh around the system harmlessly is coming to an end. As the economic recovery gains traction, here and around the globe, that excess liquidity in the system will build up pressure on prices. A little bit of that is to be expected, and can be managed through agile monetary policy, but we are talking about well over a trillion dollars. That is a lot of sloshing.
The administration and Congress are talking about spending the returned $200 billion on a son-of-stimulus sequel, despite the unimpressive performance of the original.
The economic problem is this: The return of a significant portion of the money was already factored into the budget. If we spend $200 billion on son-of-stimulus, the budget deficit is going to increase by ... just about $200 billion.
Financial sleigh rides are not a good thing, and always end badly. The Congress should calm down and think clearly before it takes us on another one. With TARP guiding our sleigh maybe everything will be OK. But it’s still a sleigh ride.
They never let poor TARP join in any Congress games.
But just when it seemed that the program’s last hope was to be a guest on Larry King to tell its side of the story, somebody discovered it still had money ... at least $200 billion, maybe more. And then just a few foggy weeks before Christmas Eve, TARP suddenly became needed and wanted, courted and loved.
Then how the Congress loved it; members shouted out with glee.
The relief program will go down in history, for sure. When the big banks, and later some little ones, looked like they were going to topple over into the pile of rubble started by Lehman Brothers and Washington Mutual, the Treasury Department came up with a scheme to prop them up — by buying their stock, by lending them billions of dollars, and by paying even more billions for what were then worthless securities, mostly mortgage-backed obligations.
Treasury’s initial plan involved re-establishing the market for these securities, but this proved more difficult and time consuming than expected. Many of these securities still sit on the Federal Reserve’s balance sheet — at this point still messy, but starting to increase, gradually, in market value. The increase in the market value of the collateral bought up during the crisis and the gradual recovery of the banks across the country does permit a reassessment of the program’s eventual cost. In fact, it makes the TARP program look less like an expensive bailout and more like a liquidity injection, which was its original intention.
The program was essentially a way to inject liquidity into a banking system sitting on a pile of securities that had zero market value — mostly collateralized mortgage obligations. It wasn’t that the underlying assets, the mortgages, had no value. They did, in fact. But because of the psychology of the collapsed real estate bubble, the market for the securities based on them had, for all practical purposes, ceased to exist.
So, in what was essentially an asset swap, the federal government purchased some of the banks’ stock, lent them some money and bought the mortgage securities — giving the banks the cash they needed to function and to re-establish their liquidity and their market credibility.
The banks are doing better and are paying back the loans now. What the mortgage-backed securities will eventually end up being worth is not known, nor is it known for sure how long it will take to sell them off without creating too much of a market downdraft.
What is clear is that the program was a success and that it will not cost as much as some initially feared, or originally budgeted.
What all of this means is that actual costs can be reduced substantially, perhaps by the $200 billion that is being discussed or, likely, even more. That is the good side. What goes wrong comes later.
To start with, the assumption that money found must equal money spent is an equation that only makes sense to Congress. It is precisely the kind of math that produces a financial sleigh ride.
Secondly, the $200 billion is not “found money” at all. And there are two good reasons for this: the return of TARP money was already factored into the budget and it was not money we ever had in the first place.
The program worked and continues to work, but the domestic and global recession that allowed liquidity to slosh around the system harmlessly is coming to an end. As the economic recovery gains traction, here and around the globe, that excess liquidity in the system will build up pressure on prices. A little bit of that is to be expected, and can be managed through agile monetary policy, but we are talking about well over a trillion dollars. That is a lot of sloshing.
The administration and Congress are talking about spending the returned $200 billion on a son-of-stimulus sequel, despite the unimpressive performance of the original.
The economic problem is this: The return of a significant portion of the money was already factored into the budget. If we spend $200 billion on son-of-stimulus, the budget deficit is going to increase by ... just about $200 billion.
Financial sleigh rides are not a good thing, and always end badly. The Congress should calm down and think clearly before it takes us on another one. With TARP guiding our sleigh maybe everything will be OK. But it’s still a sleigh ride.