R.I.P...TARP
The Troubled Asset Relief Program. Let's take a deep breath and discuss, calmly.
As our work week begins on Monday, the most controversial and highest impact piece of legislation of our recent times, will come to an end.
Top financial regulators met yesterday to break ground on a new council designed to prevent the need for more government bailouts. The anger sparked by the bailout has created a strange sort of "new normal" in regards to the public's view of government intervention and Wall Street shenanigans. Messrs Gross and El-Erian surely didn't know they were coining such a far reaching term at the time they first began to trumpet it.
Though I have always stood for TARP being a terrible decision and something that will hamper us down the road to recovery, I woke up on the right side of the bed this morning with something nubile and dividend yielding to my left. That sort of perspective and the cool gray skies of an autumn Saturday morning make me more open to discussion. Even on a subject such as this one.
I am reticent to accept, yet optimistic to hear that the White House now expects TARP to lose JUST $50 billion, as opposed to the $105 billion projected earlier this year. The Treasury Department is cautiously optimistic that losses could be nil depending on how well the AIG situation progresses.
This doesn't change the realities of our current malaise. Even if TARP were to somehow pay off like a long shot at the race track, people would still be pissed. There exists the potential for some serious thought on the subject beyond our usual party line drawn banter. Some of you guys considering Master's degrees or PhD's have been blessed with a great research subject. Make no mistake about it, if nothing else TARP will inspire a Nobel Prize winning theory or two in the not-too-distant future. Whether that means our markets will become more or less free, I can finally say with a straight face:
It's too early to tell.
Though I certainly hold dear the view that any government intervention in markets is a terrible thing, I am open to considering the positive aspects of TARP and it's aftermath going forward.
Can somebody just name a few for me?
:( with no more tarp gone how will we put shingles on houses?
Well, we have yet to spiral into a great depression but things are still bleak on the unemployment front. Are we doing better? yes. Could we still crash? yes. Was it a good decision? Maybe.
While I am less inclined than either you or Edmundo to run screaming about conspiracy theories that the gov't and big banks are in this together, what I do know is that this piece of legislation that everyone likes to shit on could have saved our asses.
So tell me, what % unemployment, starvation, etc. is "acceptable"? If Citi, BoA, Goldman, Morgan, etc. had all gone bankrupt can you REALLY say this would have been the "better" path?
Are many top economists that supported such a bailout (primarily to prevent a market with zero liquidity) all wrong? I find the simplistic, angry response very near-sighted and those that try to act like "this was stealing from us", etc. should look back to late 2008 and try to remember how much fear there was. You write a lot about ideologues and a hatred of liberals, but you do realize there is the equivalent on the other side of the spectrum, yes? ;-)
The more relevant / scary issue is will bailouts become a pattern since the system has already shown it has WAY too much systematic risk. How do you break THAT systematic risk up?
Sort of where I'm at. Still not sold it had to be done
No conspiracy theory involved in self-preservation. Throughout history the populists have devised elaborate theorems called "nation", "religion", "culture", etc to parcel people of into groups. There's really only two groups "the haves" and the "have nots". The haves are constantly fearful of the have nots taking over and the have nots always want to move up. As I have repeated ad nauseam the greatest danger to America has always been Communist/Socialism or "fairness" simply because of the above mentioned reality that we often ignore
I think 7-9% unemployment is a lot more realistic with our overall capabilities than the ~4% we were at before. It's all a matter of perspective as far as banks failing. Would it have hurt? Yes, very much so. Would it have completely cleansed the system of the garbage policies, practices and people. Yes, very much so. I know most people don't have my perspective, but I would much rather chop off my own foot, than treat gangrene for the rest of my life. This part of the argument is purely perspective based, I realize that and don't put too much stock in convincing anyone to change their point-of-view
"Many, All" have you been reading Schopenhauer again, Patrick?;-) Liquidity issues arose from the trade of toxic waste laden financial behemoth products that never, ever should have been created in an insane asylum. Liquidity is highly implicit and imaginary when you're trading dead weight. I won't even get into ninja loans and the idiots who are now crying because they signed up for them. This is my primary motivation for backing Wall Street in the general discussion.
As for liberal idiots, they get their own paragraph. My rants on the subject come from their lack of understanding (or perhaps) willful ignorance of the difference between a conservative and a republican. Unfortunately, they are not synonymous and yes I do believe that simple, plain fiscal conservatism could have prevented all of this. Just like I believe that it can prevent us going forward. Yes, that does require taking a step back from saving the whales, over-employing the unqualified, promoting female masculinity, fighting for every existent/non-existent minority group, promoting illegal aliens and a slew of other big government, liberal projects which eat up many of the resources we are sorely lacking at a time like this. America needs conservatism, not a party which whorishly calls itself conservative. I rant about it, because many good-hearted, bright liberally leaning people support big government (i.e. self destructive socialism) because they have been conditioned to interpret everything I have just written as hate, bigotry and ignorance. When it is essentially a long-winded explanation of life's ultimate ex parte ruling: GROW UP.
This is the backbone of my worries. The government is a business just like a bank, a factory or a car wash. It recruits the best talent it can get, it pays the best salary/benefit combo it can to retain this talent, it provides perks, it collects revenue, it looks to maximize profit at every turn while avoiding problems of any possible sort. In order for this business model to function, it's management must approve. Since government stands outside of its own regulations, only the voting public can prevent their profit maximization schemes. Now that bailouts have been "proven to work" (at making money for the government, expanding government powers, etc) what's to stop more of them at the slightest risk blip on our radar?
The way you break up systemic risk is by regulating, not preaching from the pulpit. The CME for instance, has never defaulted and never will. Look at how they manage risk, specifically in regards to positions and margin.
They do a fantastic job or regulating themselves over there, for one simple reason: incentive compatibility. It is not in their interest to see the sort of systemic shocks that nearly cracked all of our backs. Regulation should have always been about two issues: 1) exchanges 2) transparency. These two issues remain buzz words and not problems that are being tackled. Short answer, merge CFTC and SEC into one body. Fire all the lawyers (SEC guys) pay the necessary salaries to bring market veterans into regulatory fold and include knowledgeable people into the discussion. I'm sorry but an econ PhD does not qualify you to make the kind of assessments and calls that need to be made.
ok, so 7-9% is what you consider to be steady-state unemployment or "healthy" level. Aren't we way over that # now WITH the bailout? How high do you think that would have gone without it? I'm not saying the bailout was good. I'm just saying I don't know. To adamantly label it as a "bad idea" when it has (so far) done what it was supposed to do seems unfair to me.
So you think this entire collapse was a government conspiracy for a "power-grab"? I tend to think it was a complete failure of regulation with the RESULT being more government control so the economy didn't collapse.
I don't buy your classification of government as a profit maximizing "business". They have employees, revenues and costs -- but I really see them as a non-profit losing a shitload of money due to agency incompetence and for profit businesses repeatedly bending them over. The Banks that got the bailout were the real winners here. They were able to make record profits for years, all while subjecting the economy to huge systematic risk. when it all crumbled they were given another chance.
couldnt disagree more. This crash wasn't about being fiscally conservative it was about several types of securities (MBS, swaps and the insurance backing them) that ran wild because the incentives were there for profit-maximizing businesses to play MBS ball. I agree with you that the phD in economics may be the wrong guy to regulate this, but regulation will always be a losing game. The key is to try to minimize the frequency and severity of those losses (market participants are already figuring out ways to get around higher cap gains tax, for example).Incentive compatibility sounds great...so how do we give a bonus for reducing risk to the system when the banks are paying the best and the brightest to continually come up with new products that the regulators won't understand? Regulation is a public good, yes?
My 7-9% figure (approximate, of course) is where I thought we should have been pre-crisis. I think that when things are rolling along the implicit and explicit pressures of multiple factors (can be government, can be advocate/lobbyist groups, can be feelings of guilt/personal responsibility, etc) push businesses into hiring more workers than they really need. Best Buy, for instance, still has at least a dozen people on the floor at all times that are not needed at all, I think that to some extent, much of the workforce functioned on this false principle. Where we're at now is a lot closer to where I think we should have been back in 06/07. As for how high it would have gone without the bailout...higher, that's for sure. However, the pain would have been cleansing, though certainly not to everyone's preference.
Letting everything blow up would have rewarded those who did the right thing and punished those who didn't. Am I going to come of sanctimonious and preachy saying that I'd rather live in honorable squalor than scummy affluence? Probably. Do I actually believe in those principles. Yes I do. You are right, the bad guys did win.
As far as government goes, I agree partially with what you said. I think they're a poorly run business which often acts like a non-profit in terms of wastefulness and preference for ideologies and pet projects over concrete results. A further delving into this subject will cost you a round of beers...or six.
Don't agree at all on CDO argument. Yes, the toxic z-tranche from hell was a wet dream of crapmeisters everywhere. Problem is none of those MBS, CMBS, CDS, Swaps, Exotics, etc blow up with out the EXPLICIT aid of the government and I will be fair in saying that this completely non-partisan. If you haven't already, read up the language of the Community Reinvestment Act (1977) that lit the fuse, than Henry Cisneros blew the roof off (figuratively speaking) as the head of HUD under Clinton. This was a combination of government lunacy and irresponsible people with no business having access to a credit card, getting multi-hundred thousand dollars loans on part-time Blockbuster salaries. How's a house made of cookie not going to crumble?
I agree with your general point on the industry, but I am talking about the country as a whole. We have been coddled into thinking a great privilege, responsibility and burden like home ownership is a given. That is where the housing market blew up. The MBS fiasco was a symptom, not the disease. Our expectancy of government to protect us and our financiers to make us rich explicitly cuts out basic survival instincts. That was/is the issue.
Incentive compatibility. Pay the best and brightest what they are worth to help in the regulatory process. Can the government pay Blankfein or Dimon? No. Can they go and find a second year rock star analyst at a BB, a killer engineering grad from a top prop shop and groom them? Yes.
Regulators don't understand because they are lawyers. Lawyers are perhaps the most overvalued commodity on earth and quite worthless in most instances outside of a Perry Mason mystery. I guarantee you if the government reached out to some old time traders or younger guys they would have great results from the interaction. Regulation is always a step behind innovation, can't do much about that. What can be done is getting away from the notion that "we act once a crime is perpetrated". Look at how the CFTC resolves issues in comparison to the SEC. Wouldn't you say one is quite efficient and effective and one plain embarrassingly pathetic?
To underline, I think the bailout and everything around it was the best short term fix but I think it also opens up a Pandora's Box that cannot be closed and may lead to a lot of counter productive events long term.
Regulation is a public good. But way too often, it is of no good to the public.
http://www.npr.org/templates/story/story.php?storyId=130308567
I have never really gone in-depth and checked my numbers on this, but it seems to me that gov't bailouts of companies is a good investment for the gov't. Lets say we have an AIG (as would have happened) or bear stearns style complete collapse of a firm. That's a loss of thousands of high paying jobs, and aside from the corporate income taxes, there are the individual income taxes those workers make, the rent those companies pay for their offices, the goods and services those businesses consume and the tax revenue those activities generate, etc. It gets complicated because many of those businesses would have have been bought, or other firms would have moved in to take their clients.
It seems to me that if you have a case where you have many healthy and functioning businesses, but a grenade among them that is threatening to take the whole entity down, then a bailout may make sense. It would make a good paper or possibly even a thesis topic.
On another note, I thought companies had complex holding structures to avoid things like this. When I worked at a BB, my paycheck didn't have the BB's name on it, it was a subsidiary company called BB Capital Markets, inc. I thought that was to protect other divisions from losses in ours. I guess it doesn't quite work that way though.
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