It was a bold bet that the Treasury and Fed could engineer an economic recovery without allowing the repricing of U.S. housing stock.
By Andy Kessler at The WSJ
We should have eaten those toxic assets instead of sweeping them under the carpet.
The Troubled Asset Relief Program (TARP) was a foolish bait and switch. To prevent the 2008 financial crisis from worsening, TARP was originally designed to buy toxic mortgage derivatives weighing down banks and Wall Street, but no one could decide what price to pay for them. Too high and TARP would look like a government handout. But if the Treasury paid what they were worth, which was not much, financial firms would have to take huge write-offs, forcing many of them into insolvency and even nationalization.
So Treasury Secretary Hank Paulson switched plans, investing TARP funds directly into banks for a piece of equity. The idea was that banks would "earn out" their toxic portfolio—i.e., slowly write them off against the profits gained by the Federal Reserve's zero interest rate policy. It was a bold bet that the Treasury and Fed could engineer an economic recovery without allowing the bottoming action of a sharp but swift repricing of the U.S. housing stock. It turns out they only bought time, not a recovery, and now we are paying for that mistake.
[ Sure looks like we right back where we started with a lot of banks still holding the very toxic debt instruments that got them in trouble in the first place. Has Obama spent the money that has been paid back? Looks like we’re going to need it! – JS ]
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