A verdict on TARP

Pronounced by a TARP executive:

[T]he country was assured that regulatory reform would address the threat to our financial system posed by large banks that have become effectively guaranteed by the government no matter how reckless their behavior. This promise also appears likely to go unfulfilled. The biggest banks are 20 percent larger than they were before the crisis and control a larger part of our economy than ever. They reasonably assume that the government will rescue them again, if necessary. Indeed, credit rating agencies incorporate future government bailouts into their assessments of the largest banks, exaggerating market distortions that provide them with an unfair advantage over smaller institutions, which continue to struggle.

Worse, Treasury apparently has chosen to ignore rather than support real efforts at reform, such as those advocated by Sheila Bair, the chairwoman of the Federal Deposit Insurance Corporation, to simplify or shrink the most complex financial institutions. In the final analysis, it has been Treasury’s broken promises that have turned TARP — which was instrumental in saving the financial system at a relatively modest cost to taxpayers — into a program commonly viewed as little more than a giveaway to Wall Street executives.

Commonly viewed? A giveaway is all it ever was. Of course the banks were “saved” by it, the buggy whip industry could have been saved by having sufficient government billions funneled into it too. The problem is that because nothing of any significance has been changed, the financial meltdown of 2008 will be repeated and sooner than any of the mainstream economists believe possible.

As housing prices continue to fall – which you may recall I correctly anticipated at the beginning of the year – there will be an ever-increasing divergence between what the banks have on their books and the actual value of those assets. The fiction cannot be maintained indefinitely, but it is impossible to know what will be the spark that will set the gasoline-soaked wooden wreckage of the financial system alight.

But it is incorrect to say that the banking bailout went wrong. The banking bailout was wrong from the start.