Back to blogging... and back to the TARP, just for a moment.
Over the weekend, the bailout seems to have captured more interest, both because it's so fashionable right now to kick the Bush folks on the way out the door, and because the release of the second TARP funds went so easily when many political types wanted either more answers or no more spending. Call it CARP - Criticize the Asset Relief Program.
Much of the CARPing has come over the lack of "transparency" - that Paulson "gave" money to the banks, and "nothing happened." The New York Times complains today, as many have, that banks are sitting on TARP money, using it to shore up their balance sheets, or waiting to swoop in and by competitor banks.
What the story tends to ignore is how we got here, and it's worth going back for a moment to remember why banks got direct investment. When Paulson first proposed the bailout, remember, the "troubled asset" idea was paramount: he suggested going in, buying up the bad paper - mostly mortgage bonds which were considered worthless and unsellable - and having the government hold it so banks could clean up their balance sheets.
That proposal ran into lots of questions about valuation: if no one knew what the paper was worth, what was a fair payment? How would the government value those assets? And how much control would the government have over the underlying mortgages?
At the same time, bankers in Europe moved on a slightly different idea - investing billions directly by buying shares in the banks. Financial experts thought this made more sense. Paulson was encouraged to go the same route. Direct investment, the theory went, would help banks clean up their balance sheets, and get back to lending, easing the credit crisis.
All over the world, that plan has largely failed; banks have resumed lending, but in far more limited ways, and though credit markets are unfrozen, they are by no means considered healthy. The money Paulson distributed hasn't been enough to shore up Bank of America, still reeling from absorbing Merrill Lynch's losses. The money hasn't saved Citibank, which is beginning to sell off pieces to try and stay solvent.
Is there a lack of transparency? Not really; there's just been a lack of resumption of lending. But that notion - why not just resume lending - is also curious, since "lend like you used to" is kind of how we got into just the mess we have now. As I mentioned on Friday, the idea that banks can resume the levels of mortgage, car loan, or credit card debt is essentially absurd. That was unsustainable. That's why we're here.
I'd forgotten to mention, though, loans for small business (and large ones, too); that lending, which is also in crisis, has major implications for any recovery, and it is those concerns about business lending which are driving a lot of the TARP complaints. But here too is a paradox - how do you lend to companies when they are driving into the teeth of a major business downturn? How can you lend to retailers when no one is shopping? How can you lend to the manufacturers of retail goods? How can you lend to the people who supply the manufacturers? Work your way up and down the chain of the consumer economy, and the idea that there's a lot of business lending to be done is just as curious as mortgages and car loans.
Look, I still think Paulson - a smart, analytical guy - was onto something to begin with: buying the distressed assets was not a bad idea, and I wish he'd pursued it. But direct investment has done what it was meant to do - what people don't get is how close we came to a total financial meltdown. And in that, I wish Paulson had said more, publicly, about what the problems were, and how deep they went. We're still unpacking - look at the B of A and Merrill story - just how bad bank balance sheets really are.
Where Paulson has messed up, I think, is in the underlying problem - mortgages for both personal homes and commercial property are in a lot of trouble, still, and the foreclosure crisis is still a growing problem, not a shrinking one. As this Washington Post story indicates, we're past the point of calling foreclosure a Subprime story; loans of every sort are heading into foreclosure, and the waves of layoffs and business downturns will keep that rolling along for some time to come. The problem is, as it was last October, is that "mortgage relief" is a term without definition. Allowing people to refinance overpriced loans at lower rates won't fix it, because the underlying values aren't there anymore. Allowing some people to finance a new loan at a lower house price... just undermines all the houses around them. This is the real, painful bind that's driving our economic crisis - the basic deflation of almost every family's biggest investment asset.
On one level, the CARP stories, then, are meaningless: carping about direct investment in banks, when everyone pushed Paulson to do it, is literally a day late and a dollar short. On another level, the TARP story is the real reason the Obama Stimulus plan may have huge problems getting passed: absent a solution to the foreclosure mess, it's hard to see how any 'economic stimulus" can get us out of this problem. Figure out the mortgages... and we might have a chance. Anyone think Tim Geithner's got an answer for that?
Me either.
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