TARP and the Financial Industry

February 3, 2009

As President Obama and Congress continue to consider how to jumpstart the economy, Fellow Douglas Elliott says that the plan must include dealing with the financial industry overall, its toxic assets as well as policies that work for consumers and businesses alike.


“I think the TARP had a lot of benefit in terms of keeping things from being even more disatourous than they have been. There’s been a lot of work done on how bad a recession can be when it’s coupled with a bad banking crisis. It’s a lot worse than what we have gone through so far. So hopefully, the TARP has been one of things keeping it from getting that bad.”

“…You know there is right from a business point of view and there is a right from a public policy point of view, and then there’s the intersection since we have handed them money to what extent do they take on public policy obligations. From a business point of view if I were running a bank I wouldn’t be making a lot of loans right now. We are going into a maybe the worst recession, we’re in the worst recession since the Great Depression, and it’s getting worse. Everybody’s worried about whether they actually have as much capital as the claim they have, and even if the bank isn’t worried their depositors and creditors are worried, and their shareholders are worried. Smart thing right now from a pure business point of view is just hunker down, don’t lose a lot of money and keep your job. Now from a public policy point of view it may be smart for consumers not to spend as much, it may be smart for manufacturers not to invest, it may be smart for the banks not to lend, but it’s disastrous for the economy. If everybody just holds of on doing anything for a year we would crash, so from a public policy point of view we are looking for someway to move people to do things again.”

“…You can make a case that lending has grown a little bit or shrunk a little bit, but the key here is, the hope was that there would be substantially more lending. One of the problems though is that the banks are concerned about having enough capital to protect themselves. Capital is there to protect you in case your loans don’t get paid back , and it’s a scary environment right now, and because of these toxic assets people are afraid that their capital may not be eleven percent of their loan volume maybe it’s only seven percent if they really knew the value of these assets, so their hoarding capital. The only way to improve that ratio, capital loans, is either make fewer loans or have more capital. They are having trouble getting more capital, so they hold back on loan growth.”

“…The three people talking about are bad bank, where they buy the assets, a guarantee structure where the government provides a guarantee on those assets somewhat below it, and finally nationalization, where the government takes over the banks, at least the weak ones. They are all bad solutions, but in my opinion the least bad solution is for the government to provide significant guarantees somewhere south of the current estimates of value, and then those banks that are still weak even with that kind of guarantee should just be taken over.”