It’s hardly shocking that economists are taking a dim view of the TARP program:
The government’s official view that toxic assets are incorrectly priced due to illiquidity “fire sales” is wrong, a new study by Harvard and Princeton finance professors suggests…. This latest paper effectively demolishes the “fire sale” view. It draws three important conclusions.
Many banks are now insolvent.
“…many major US banks are now legitimately insolvent. This insolvency can no longer be viewed as an artifact of bank assets being marked to artificially depressed prices coming out of an illiquid market. It means that bank assets are being fairly priced at valuations that sum to less than bank liabilities.”Supporting markets in toxic assets has no purpose other than transfering money from taxpayers to banks.
“…any taxpayer dollars allocated to supporting these markets will simply transfer wealth to the current owners of these securities.”We’re making it worse.
“…policies that attempt to prevent a widespread mark-down in the value of credit-sensitive assets are likely to only delay – and perhaps even worsen – the day of reckoning.”
The Wall Street bailout was never about stabilizing the economy, much less fixing it. It was simply a means of insulating the banks from the consequences of their actions and the consequences that their actions have had on the economy. Years before the current crisis became evident, it was apparent that Washington runs for the benefit of the bankers, not the electorate. Which is why, as more and more economists are coming to realize, it simply isn’t going to work.
“What the Obama team is proposing is disconcertingly similar to the actions of Japanese Prime Ministers Hashimoti, Obuchi, and Mori in 1995 and 1998: Rather than ask the legislature for straightforward recapitalization money, you have the political leadership preferring to risk overpaying current owners of toxic assets rather than forcing sales. For all of Japan’s supposed intervention in markets, its government still lacked the stomach for taking over banks, let alone closing them.”
Keen economic historians will probably recall that Japan was not exactly known for its economic growth during this time. This isn’t to say that I support nationalizing the banks, as the UK has done, only that nationalization is actually a less disastrous approach.