Monday, February 9, 2009

How do you turn a dollar into 66 cents?.........

.............Hide it under a TARP

While the time since President Obama's inauguration has been largely consumed by passage of the stimulus legislation, it appears that this week there may be a return to where we started last fall, the TARP. No doubt there are some among us that are tired of hearing about it, but I suspect that ultimately unraveling the current mess may have more to do with how we handle the financial sector problems that TARP was intended to address than whether we build some new roads, bridges, or schools. So before Secretary Geithner unleashes TARP 2.0 on us, it is worthwhile to see how the first part of TARP fared.

The best source for this is the Congressional Oversight Panel (COP). This panel was set up to monitor the actions of the Treasury and to assess the results of those actions. The Chair of the COP is Elizabeth Warren, which is at least some reason for hope. Professor Warren comes across as smart, but with a down to earth sensibility that one might associate more with successful business owners rather than Harvard professors. My wife and I both highly recommend her book The Two-Income Trap and think it ought to be required reading for all married couples (and everybody else). The COP's latest report discusses the value of the assets that Treasury (that is, the taxpayers) bought with TARP money. The conclusion is that for the deals they examined every dollar spent on purchases returned assets worth about $0.66. Here is Warren discussing the results (it's only 6 minutes to discuss $184 billion worth of expenditures, so the pace is about $30 billion a minute):

In assessing the effectiveness of the TARP thus far, there are two key points that Warren discusses in the clip above.

First, the difference between the Treasury cash infusions and the value of the assets turned over to them are, in fact, a subsidy of the institutions that received this money.

Second, the way that this plan was sold to the American people the first time around did not include a discussion of subsidizing these financial institutions. Warren is careful to point out that there may be very good reasons to subsidize these institutions, but that was not even part of the discussion when this plan was put forth last fall.

It is important to remember that Treasury Secretary Geithner was not an outsider to the original TARP plan. As head of the New York Fed he was involved closely with the plan as it evolved under Bush and Paulson. His firsthand knowledge of the situation and the government response was seen by some as a positive when he was being considered for the job at Treasury. As the Obama administration moves from the stimulus bill back to repairing the banking and credit system, it will be critical to see not only what approach they choose to pursue, but how they describe that approach to the American people. I won't be surprised at all if Secretary Geithner is able to learn from the mistakes of Bush and Paulson, but the more important question is will he be able to learn from the mistakes of his own.

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