When then-Treasury Secretary Hank Paulson explained to the American people that the TARP had shifted gears from buying toxic assets toward making direct capital injections in banks, he insisted that the purpose of the program was to get banks to “deploy, not hoard, their capital.”
“And we expect them to do so, as increased confidence will lead to increased lending,” Paulson said.
Now the people charged with overseeing the TARP say that this hasn’t worked. Cynics say that the overseers were expecting too much and are creating the danger that banks will make politicized loans that will only further imperil the financial system.
Indeed, as early as January, just a few months after the TARP was put in place, the smartest people were telling us to instantly forget the promises of the TARP. We should have been smart enough to know that those promises of increased lending were just lies. It was really all about propping up failed banks.
“The purpose of the investment was not to provide the means for the firm to make more loans but to avoid the firm’s failure and the devastating consequences of failure for the economy,” Jack Guttenberg wrote. (Via an approving Justin Fox of Time magazine.)
That’s a straight up bait and switch. Unfortunately, both sides are a little bit right. We don’t want banks to respond to politicians by making poorly thought-out loans into a recessionary economy. We want our banks to be well-capitalised. But, at the same time, taxpayers are right to be outraged that the bailout itself was poorly thought out, unable to live up to its promises.
These issues are confusing. So let’s use a clearer example. Imagine the political leaders of a mid-size American city decided that they desperately needed a new airport terminal to attract new tourists, businesses and commerce. Next they go ahead and raise the money for the airport, but instead of doing it themselves, they distribute it to a bunch of private companies. The deal is that the companies will build the airport.
Fast forward to 10 months later. The airport terminal hasn’t been built. Indeed, many people now say we don’t really need an airport because air travel is down. Instead, one of the companies who got the money built a new parking lot. Another increased pay to the workers in the old terminal, warning that we’d lose even more travellers if the quality of employees declined. The operators of one of the old terminals bought a tiny one in a nearby town. Yet another held the cash for a while, then returned it, explaining that it was in the business of running taxis from the airport rather than building terminals.
Don’t worry, all the enlightened people said. We’re making so much money from the parking lot, the taxis, the acquired smaller airport, that someday we might get around to building a new terminal. But right now it just doesn’t make sense.
Wouldn’t the public be entitled to wonder why they were told they’d get a new terminal, or even why they were told the new terminal was so desperately needed?
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