Thursday, January 15, 2009

What do you get when you subsidize failure?

What is Treasury doing with the TARP funds?
The magnitude of the cash involved is so large that to the average human being it is an incomprehensible abstraction. The captain of one respected financial trade organization here in Washington, D.C. says that, all told, government "investment" and commitments aimed at ending the financial crisis total $9 trillion.

Treasury Secretary Paulson and his minions have used some of the TARP funds to buy assets; some to bolster the capital of troubled banks and corporations; and some to merge troubled banks that they have deemed "too big to fail" into other supersize banks to create new banks that are "way too big to fail." All this is designed to get credit flowing again.

But so far, it hasn't worked. In fact, it's made the credit situation worse, according to community bankers. They charge that the government's generous support for the large financial institutions has engendered a serious liquidity problem at smaller institutions. Newly minted banks like GMAC, Goldman Sachs (ticker: GS) and Morgan Stanley (MS) are so desperate for funding that they are offering savers above-market rates, stealing depositors from smaller institutions that have little or less government aid and consequently lower profit margins.

If the situation persists, it could push these otherwise healthy community banks off the cliff.

"If anything, our system is more unstable today than it was when this whole thing started in the fall of 2007," says Camden Fine, president of the Independent Community Bankers of America. He bristles that the government has decided to aid large institutions at the expense of the smaller ones, "We need to bust these Cyclopes up so that they never again hold a gun to the taxpayers' heads," he says.


  1. Here is one way to get a handle on just how big these numbers are. How far would the auto bailout request of $17 billion go if it went to pay workers who would be laid off? The BLS reports that there are 962,600 workers in all of the auto industry (mfg., parts, Mich, Kent. etc.) earning an average of $21.98 per hour. If 20% were laid off (as they eventually will be) and paid the average amount ($45,718 per year), the bailout could provide two years of severance pay.

    Instead, they are likely to blow through it in mere months. How?

  2. big business loves government regulation because it provides barriers to entry and ultimately smothers out competetion. no wonder, big banks and big business are all in favor of bailouts.