TARP was successful

[Jay]

Re: TARP was successful

You make a good point. I know the banks generally paid back their loans, but they were in a position to benefit from additional help from the Federal Reserve. As I recall, there was some BS accounting and/or overly optimistic projections involved when it comes to very sick companies like AIG and GM. AIG will pay back their TARP funds only if their stock goes really really high for no very good reason. And I think you're right about GM.

In a way, the banks got a loan to fix their balance sheets too. They got their money from the Fed however, instead of the Treasury. The collateral the banks used was crap and now it's on the Fed's balance sheet. It is just a shell game. The tax payer does eventually pay for it through inflation, and if you agree with the premise that if we let the system fail we would have had very high initial unemployment but now would be on much better footing economically (and the Depression of 1920 gives credence to this possibility, GDP fell 24% and then the economy recovered immediately when Harding left it alone!), a portion of continued unemployment benefits and even possibly lost GDP would have to be counted as a taxpayer cost also.

And we wouldn't be stuck with such an opaque economy to put it kindly.

[Starving Steve]

Re: TARP was successful

How do I become a bank in the United States and a member of the Federal Reserve System? Which member of Congress gets a brown envelope?

How does a bank lose money in the USA, especially when a bank can take money from the public at zero percent and invest in long-term Treasury debt at 4%? How can a Fed-member bank lose money on bad loans when the TARP takes the bad loans and pays the bank back in-full? Then the bank buys Treasury debt at 4%, and this could be done forever? Or if the bad loans can not be converted to cash forever, what is the upper-limit to bank losses acceptable to the TARP?

How big could my year-end bonus be this year, especially if I could get my Fed-membership and bank charter going before Dec 31? How fast could I lose money?

Do I have to wear a suit and tie?

[BillBoard]

Re: TARP was successful

Do I have to wear a suit and tie?

Only if you want to be playing with the real big boys and have access to the Fed. Otherwise no, you can stay playing with those mini Internet bankers, the one's of no consequence.

[charliebrown]

Re: TARP was successful

If a bank is buying long T's, what happens if interest rates rise? They are still in trouble. All those, who borrowed short to lend long, are clenching their b-holes right now as the 30 year has seen a 5% hair cut in a little more than an month. If you're a euro denominated bank holding them you've seen a 17% loss.

Hope QE2 buys the 30 yr!

Then again what happens to the fed? If its balance sheet is chock full of 30yr t's and inflation starts, there is no way to call the money back. You bought T's at 108, and you'll only be able to sell them at 90??

[ASH]

Re: TARP was successful

If a bank is buying long T's, what happens if interest rates rise? They are still in trouble. All those, who borrowed short to lend long, are clenching their b-holes right now as the 30 year has seen a 5% hair cut in a little more than an month. If you're a euro denominated bank holding them you've seen a 17% loss.

Hope QE2 buys the 30 yr!

Then again what happens to the fed? If its balance sheet is chock full of 30yr t's and inflation starts, there is no way to call the money back. You bought T's at 108, and you'll only be able to sell them at 90??

Yeah... same with the MBS they bought. So in that eventuality, you've got to do something else to call the money back. For instance, you could require banks to hold higher reserves. As long as you're willing to change the rules (which they certainly did in the other direction during the crisis), there's not much risk of painting yourself into a corner with a fiat money system like ours. What's good for fighting deflation is sauce for the gander... provided you have the will and authority to do it. The constraints which aren't simply a matter of mutable rules are mostly related to external trade. Aside from the external trade constraint, the most likely failure mode (in my opinion) is divided or politically weak policy-makers who aren't able to push through a change in the rules to call the money back. There's usually somebody who benefits from a flood of cheap money, and they may have enough power to prevent its recall.

[Starving Steve]

Re: TARP was successful

If a bank is buying long T's, what happens if interest rates rise? They are still in trouble. All those, who borrowed short to lend long, are clenching their b-holes right now as the 30 year has seen a 5% hair cut in a little more than an month. If you're a euro denominated bank holding them you've seen a 17% loss.

Hope QE2 buys the 30 yr!

Then again what happens to the fed? If its balance sheet is chock full of 30yr t's and inflation starts, there is no way to call the money back. You bought T's at 108, and you'll only be able to sell them at 90??

Three things to remember:

1.) THE U.S. HAS NEVER OFFICIALLY DE-VALUED ITS DOLLAR;
2.) THE U.S. HAS NEVER DE-MONETIZED ITS MONEY NOR INTRODUCED A NEW CURRENCY;
3.) THE U.S. MIGHT LEAVE INTEREST RATES AT ZERO PERCENT FOR "AN EXTENDED PERIOD OF TIME", MAYBE 30-YEARS, SO A BANK MIGHT HOLD U.S. TREASURY DEBT RISK-FREE UNTIL MATURITY AND MAKE 4% PER YEAR, REGARDLESS OF WHERE INTEREST RATES OUGHT TO GO.

I have to become a Fed member-bank! Why work? Why worry? Why starve? And you could get into the TARP too, so losing money could be even better for you!

How do you lose money at this game? That would take an economics education or an MBA degree to figure-out.

[bpr]

Re: TARP was successful

True... it may not be possible to maintain these conditions long enough. Very loose monetary policy happens to align with our current goals for the dollar's exchange rate, but that could get out of hand. Also, if this mortgage documentation debacle results in a ruling that forces banks to buy back mortgages, all bets are off. I agree with your point that things are still strapped together with bubble gum and rubber bands. If the banks can spread out their losses on bad loans long enough, they'll be okay. The recent drop in non-performing loans is maybe a sign that things are under control. Or maybe it will reverse as stimulus spending fades.

Excellent responses, Ash, as always.

The question is, then, can the Treasury and the Fed extend the game of kick the can for long enough that banks can "earn" their way out of the bad debt.

The problem is, of course, that the game itself might encourage the banks to undertake riskier bets and thus perpetuate the game ad infinitum.

[BillBoard]

Re: TARP was successful

Excellent responses, Ash, as always.

The question is, then, can the Treasury and the Fed extend the game of kick the can for long enough that banks can "earn" their way out of the bad debt.

The problem is, of course, that the game itself might encourage the banks to undertake riskier bets and thus perpetuate the game ad infinitum.

Why would the President veto this bill?: http://www.govtrack.us/congress/bill.xpd?bill=h111-3808

H.R. 3808:Interstate Recognition of Notarizations Act of 2010
To require any Federal or State court to recognize any notarization made by a notary public licensed by a State other than the State where the court is located when such notarization occurs in or affects interstate commerce.

[DToM67]

Re: TARP was successful

Why would the President veto this bill?: http://www.govtrack.us/congress/bill.xpd?bill=h111-3808

H.R. 3808:Interstate Recognition of Notarizations Act of 2010
To require any Federal or State court to recognize any notarization made by a notary public licensed by a State other than the State where the court is located when such notarization occurs in or affects interstate commerce.

To negate a would-be loophole re:MERS frauds....? But this reasoning sounds too good to be true.

[sunskyfan]

Re: TARP was successful

I think we sometimes get lost in the idea of Fiat and totally fungible. In Mathematics I can do a lot of fancy things with numbers that I can't do in Physics because in Physics numbers are tied to units (meters, watts, kg ect ... ). The chickens will come home to roost on the number play that is going on with governments and banks. For us unlucky bastards that don't have a job and are underemployed it is not theoretical. Soon it will be obvious that you have the US economy standing idle because we are deluding ourselves with this stuff and when you have houses and condos standing empty and people with no where to live because the FED/GOV will not force the system to rectify its failure all this abstraction will be pretty silly.

Another thing to keep in mind. The more you hear the gov trumpeting the success of TARP the more you better worry that TARP II is coming.

[thriftyandboringinohio]

Re: TARP was successful

....The more you hear the gov trumpeting the success of TARP the more you better worry that TARP II is coming.

That's a very good point.

[DToM67]

Re: TARP was successful

As I understand it, TARP was a taxpayer-funded program run by the Treasury. It is different from the various actions taken by the Federal Reserve. Originally, TARP was going to be about purchasing toxic assets. Fortunately, they wised up, and the plan changed. Instead, the Fed "printed" money to buy a lot of the bad assets....

... Instead of the Treasury, it is the Fed that has a bunch of questionable assets to deal with... ...but that doesn't cost the taxpayer anything...

If, with each dollar printed the US taxpayer is put further into debt (debt based money) then the cost is squarely on the taxpayer (debt created by the privately owned Fed).

No sarcasm: Am I missing something here?

[Starving Steve]

Re: TARP was successful

I think we sometimes get lost in the idea of Fiat and totally fungible. In Mathematics I can do a lot of fancy things with numbers that I can't do in Physics because in Physics numbers are tied to units (meters, watts, kg ect ... ). The chickens will come home to roost on the number play that is going on with governments and banks. For us unlucky bastards that don't have a job and are underemployed it is not theoretical. Soon it will be obvious that you have the US economy standing idle because we are deluding ourselves with this stuff and when you have houses and condos standing empty and people with no where to live because the FED/GOV will not force the system to rectify its failure all this abstraction will be pretty silly.

Another thing to keep in mind. The more you hear the gov trumpeting the success of TARP the more you better worry that TARP II is coming.

Yes, what should strike everyone as odd is that homes and condos stand vacant; our kids don't have jobs; our kids don't have homes; people have no work; people sleep outside; prices are rising for necessities, and the economists speak in Greenspanese or higher-math.

This horrid Great Recession has many parallels with the 1930s, but it differs in many ways, too. Unlike the Great Depression, we have serious inflation now. We have gangsters now who celebrate mass murder. We have no unions except for those that don't need unions (i.e, the labour-aristocrats). There are no public works projects. There is no plan in government to dig-out of this mess. And there is increasing fear and loss of confidence, so people don't know what to do.

One can not go to the bank and get ten silver-dollars for a ten-dollar bill. If you do have a ten-dollar bill, you get nothing for it at the bank except for two five-dollar bills. There is no place to invest money because nothing is a safe investment. There are no hiding-places. Education is worthless. Everything that used to be is more or less, gone.

"The velocity of money is slowing-down," according to economists. How could the velocity of money not slow-down, if people have no income? No income means people become afraid and lose confidence in everything, so they hold onto whatever they have: condos, homes, gold, cash, savings, whatever.

Students in universities to-day should protest, to put it mildly.

[ASH]

Re: TARP was successful

When the Fed prints money, it does not add to the public debt. The difference is that when the Fed "prints" money, it is purchasing an existing asset, whereas in the more familiar case of a commercial bank creating credit, the "asset" that balances the new credit is a new debt. In terms of double-entry bookkeeping, when a commercial bank creates money by extending credit to a borrower, the double entry consists of the credit extended to the borrower and the balancing debt held by the bank. But when the Fed prints money to monetize an asset, the double entry consists of the reserve credit extended to the seller (a bank) and the balancing asset held by the Fed. Although the assets purchased by the Fed are generally debt instruments (traditionally Treasurys, but more recently mortgage-backed securities as well), monetization of these assets by the Fed does not create any new debt in the system. Rather, the debt was created by the US government at an earlier point when it originally sold the bonds, or by the pool of borrowers who originally took out mortgages. Thus, the debt held by the Fed after printing money to buy said assets would already be in the system, regardless of whether the Fed purchased it or not.

Technically, the money created by the Fed is a liability of the Federal Reserve and an obligation of the United State government. But the sense in which a federal reserve note is a "liability" of the Fed, is that you can exchange such notes for assets held on the Federal Reserve's balance sheet... assuming they're selling. The sense in which a FRN is an obligation of the US government is more-or-less meaningless: "They shall be redeemed in lawful money on demand at the Treasury Department of the United States, in the city of Washington, District of Columbia, or at any Federal Reserve bank." Well, since the slips of paper in question are "lawful" money, that doesn't really mean much anymore. Of course, the US government is also obligated to accept such notes as payment for debts you owe to the government, and is obliged to force others to accept such notes as payment for private debts.

Anyway, the sort of "obligations" that the Fed prints don't have the same implications for the taxpayer as the obligations the Treasury takes on by selling bonds. In fact, when the Fed prints money to buy Treasury bonds, it returns the interest paid on the Treasurys by the taxpayer to the taxpayer, less the cost of running the Fed. The same goes for MBS. So when the Fed prints money to buy a Treasury bond held by, say, Goldman Sachs, what happens is that the American taxpayer stops paying interest to Goldman Sachs, and instead gets most of the interest payments refunded by the Fed. See this article, for instance, about how the Fed made ~$45B last year, and refunded most of it to the American people.

This isn't to say I'm in love with the Fed, or the policy response to the crisis -- nor do I think that the approach taken is free of negative consequences. But I do think if we're going to hate on the Fed and Treasury, it is important to understand the details of what they actually did, and how it impacts us as taxpayers. (This isn't directed at you in particular, DtoM67, but is meant as a general plea for more wonkish wrath.) It could have been better, but it could have been worse. Personally, I'd rather the Fed monetize a bunch of MBS and kick back what interest they do collect to me, rather than the Treasury borrow money to buy a bunch of MBS... sticking me with a wasting asset AND interest payments.

[charliebrown]

Re: TARP was successful

yes, but if the bank holds the 30yr t's to maturity, what happens to the depositors? With high inflation of 12%, the bank is going to have to pay roughly 12%, or depositors will bolt. So you have assets returning 4% and depositors demanding 12%.