TARP is Dead, Long Live TARP

I'm not an economist, but judging from my neighbors, our problem isn't capital on Wall Street, it's the dwindling wealth on main street. I believe this is the point that Elizabeth Warren has been arguing.

No demand among consumers? Really? I'd like to sell my home in Chicago, but it required me to get a jumbo, non-conforming loan, which, at the time, carried a very reasonable rate. No one can get jumbo- non-conforming loans at reasonable rates now, so I'm not sure how I'm going to sell my house. I'd like to see the government do something to encourage banks to more freely loan to qualified borrowers.

If the govt and private investors can invest enough capital directly into the sector, eventually the percent of troubled assets to the capital base will decrease to more manageable levels.

It was always more unwieldly for the govt to try and take these assets off the books, price them, manage them, and resell them down the road for uncertain value.

Banks get more lending bang for the buck through equity infusions vs. asset sales and if other investors aren't requiring that they sell the toxic assets then there's no point in the govt buying them. Better to just factor it into the cost of your equity investment and go from there.

Plus the Fed now gets an immediate preferred interest return on all this money they are pumping into the system...money that can be used to support the budget.

$1 trillion x ~8% preferred interest = $60 billion in annual dividends to the Fed. We could use every penny.

Why the f--k isn't that money going into job creation? No, let's just help people build up their debt through the credit card industry.

Kevin, I feel like you're pulling a bait-and-switch kind of maneuver here. Several weeks back when the massive bailout bill was being debated, failed and then passed, the talk was all about the freeze in the credit markets ... specifically in terms of overnight borrowing used by big corporate entities as a standard practice to keep day to day operations flowing (without having to keep a lot of capital "on the sidelines" to smooth out the cash flow bumps). The problem everyone was discussing was NOT whether John Q. Public could get a car loan or mortgage. The issue was whether the whole freakin' economy was going to take a big tumble due to the freezing of the credit market.
Financial system credit problems are not the same as consumer credit problems, even though one might beget the other. Are you saying that we have solved the big financial system credit problems and now we should turn our attention to consumer credit?

... forgot that you need to factor in the cost of borrowing for the Fed. With the 10-year at about 3.5%, that's a positive carry of at least 450 basis points if you assume an 8% interest rate (and I think that may be low).

So that would be a net of $45 billion to the Treasury per annum. A sweet deal.

I can't get you the macro answer, but I can give you some anecdotal info. I work for a large home improvement company. Projects range from 2K - 40K. We finance about 85-90% of our projects. Within the last year, our lender's credit standards have tightened considerably, and they've ditched one (longer installment term) program entirely. Within the last 45 days, we've had to pass on at least 3 15K+ projects because we couldn't get credit for customers earning six figures with fair credit.

I am not convinced that a lack of credit is the problem. The economy is struggling because many, if not most, consumers lack purchasing power. They need jobs and those with jobs need raises. We are all out of real estate equity. Putting more money on credit cards is not a long term solution.

Paulson's approach more like prescribing a pain killer than a cure. Without a cure the pain killer doesn't really solve a thing except immediate pain.

Kevin,

You don't know?

Really?

There seem to be a vast array of statistics that point to the fact that most Americans earn less than they spend (negative savings rate). The way they continued to operate as consumers was to finance the difference with debt. If the creditors stop extending it and borrowing dries up, does that mean the demand has vanished? No! Demand for a free lunch will never vanish. It's only when someone understands that they have to repay a loan that they are cautious about taking it. Consumers may not have understood that but banks have - so they are cutting lending to those who can not show that they have understood this. What a shocker!

The idea of buying up "troubled" (damn near worthless) assets was never a good one. I glad that Paulson, incompetent boob that he is, has seen the light.

The consumer credit market is in fact drying up, because no one in their right mind would by securities based on shaky credit card debt or auto loans. This is why Paulson's scheme won't work. Banks won't lend their own money; hell, they don't even know how. If they can't securitize and resell this consumer debt, they'll just sit on their money, no matter how much we give them. And until we can come up with a better predictor of credit performance than a FICO score, until we can trust the bond rating agencies, securitization is dead in the water.

And now the proposed automaker bailout. It's a big mistake. Bot Chrysler and General Motors are right now, in every sense of the word, insolvent.

Chrysler is clearly destined for bankruptcy and liquidation. Taxpayer largess will at best postpone bankruptcy, but will not prevent it. The troubles at Chrysler are so deep and ingrained that reorganization is not an option. The Jeep division will be sold off, most likely to Nissan. The Viper brand will be sold to a group of private investors, and will subsequently fail. Chrysler LLC will survive only to supply parts and warranty service.

General Motors is a viable automaker, but GM will also ultimately enter bankruptcy. GM, however, will reorganize and survive. The net loss of jobs (industry wide) will be no greater than what GM would shed in any event.

Auto industry lobbyists are currently claiming a GM bankruptcy would cost 2 million jobs. Don't be fooled. The 2M figure assumes that GM, Ford and Chrysler all fail and are liquidated, and further assumes that their subcontractors work exclusively for the big 3 (they don't). This scenario is nothing more than a scare tactic; it won't ever happen.

It should also be kept in mind that the American automakers have global operations, and source many (in some cases most) of their parts and sub assemblies overseas. Any bailout of the big 3 shouldn't be solely the responsibility of U.S. taxpayers; the burden should be shared by all those who stand to benefit.

Dave Brown is dead on correct.

My fear is that the Dems will offer a so-call "stimulus" plan that just bails out the same screwed-up financial and industrial dinosaurs that got us into this mess. Exactly the wrong move to make at this time.

Might as well make a big bonfire out of cash.

TARP 1.0 or TARP 2.0, it's missing something obvious.

We have been told these companies are TOO BIG to fail.

How will TARP X.0 address this?

Where are the plans to break these companies up?

As a taxpayer paying for the bailout, I demand these companies be broken up in the name of national security.

With the election of Obama there are many who see the option of mortgage workouts as better than all others. Yes, Paulson hasn't spent money to get those bad mortgages out of the market (showing his plan was bogus all along), but he won't be there much longer.

I think we could've been further along if people had begun to fix the mortgages when the Dodd-Shelby-Frank housing law went into effect (early September I think), but things are beginning to change now. I wonder how many people went through foreclosure and lost their homes in that time.

Democrats in Congress did the responsible thing and Paulson has pissed it all away. If things go bad don't come 'round blaming Democrats!

MarkH: Democrats in Congress did the responsible thing

Handing over $700B of our money to irresponsible parties with only the most absurd fig leaf protections is the "responsible thing"? Bush/Paulson may be the crooks, but the Democrats in congress are their irresponsible enablers.