TARP is Failing to Revive Access to Affordable Credit
Posted by Michael A. Kamperman on April 16, 2009
The Treasury’s TARP program is failing to enhance lending to both businesses and consumers. The Wall Street Journal has reported that “in a monthly snapshot of lending by the 21 largest banks receiving Troubled Asset Relief Program funds, the Treasury said credit being offered fell 2.2% across all commercial-lending and consumer-lending categories in February, compared with the prior month.” The purpose of the TARP funds was twofold: to stop the panic that engulfed the stocks and bonds of financial companies and to regenerate access to affordable credit for both businesses and consumers. The TARP has succeeded in buying time and ending the panic. However, it has failed to revive access to affordable credit. This is a serious problem because in recent years the shadow-banking system has supplied up to 75 percent of the credit in the U.S. The shadow-banking system is on life support, and parts of it, like the non-government asset-backed securities market, practically ceases to exist. The hope was that the banks could absorb much of the need for new credit. While that goal is still attainable, it is not attainable through the TARP.
The problem is that the TARP funds have been distributed to two types of banks: healthy banks and zombie banks. The zombie banks simply want to survive, and they are trimming their loan portfolios and raising interest rates and fees on paying customers wherever they can. However, the healthy banks were basically forced to take the TARP funds for the good of the system. Since these banks took the TARP funds, Congress and the White House have sought to impose limits on executive pay, on bonuses, on the use of private jets, and even on travel to conferences at luxury resorts. Basically the country is in a depression, and the message from Washington to healthy institutions is don’t spend any money that might circulate around the rest of the economy. It is understandable that institutions needing taxpayer assistance should not be rewarded with bonuses and perks as though they were profitable on their own. But the healthy institutions that so far don’t need government assistance feel constrained operating under the whims of the President, any of the 100 Senators, and especially any of the 435 Congressman. Today on a conference call Jamie Dimon, the CEO of J.P. Morgan, declared that his company had the cash to pay the TARP back today and desired to do so as soon as possible. He called the TARP funds a “Scarlett Letter.” Additionally, J.P. Morgan does not plan to participate in the Treasuries new Public-Private Investment Program designed to move troubled assets off the banks balance sheets. This means J.P. Morgan is sitting on the TARP funds and not lending them out.
The solution is to let any bank in a position to repay the Treasury out of the TARP program. The funds can then be placed into a program that will enhance access to affordable credit for consumers and businesses. If Wall Street learns which banks are the zombie banks, then so be it. The zombie banks will be able to survive with government assistance anyway. The federal government needs to focus on reviving access to affordable credit, and it needs to quit focusing on reviving trading in troubled legacy assets. No matter how many of these distressed assets trade back and forth between government-backed hedge funds, credit won’t revive. And unless affordable credit is revived, the economy is destined to sink further.
