Friday, February 6, 2009

Haste Makes Waste

As we close out the week and reflect on what has been accomplished so far with the expenditure of TARP funds, we would have to conclude that "Never have so many accomplished so little with so much." (Apologies to Winston Churchill)

The GAO report had a sentence that summed it up best: "...Treasury's strategic vision for TARP remains unclear." We know that the first vision for the program was to buy bad assets from the banks to clean up their balance sheets. This vision was quickly scrapped in favor of direct capital injections into troubled banks, essentially for the nine banks that accounted for about 55% of all deposits.

After the strategic 180, the execution of the direct capital infusion program fell apart completely, as the funds got dispersed to hundreds of banks as opposed to focused on the ones that could cause a systemic failure. Furthermore, the valuation of the government's investment was so incompetently executed that taxpayers gave significant subsidy elements to the banks. Whereas Warren Buffett and others got more security value per $100 of investment, the taxpayers got much less in value for their investments.

There are "ongoing questions about the (Treasury's) communications strategy" for reporting on the success of the TARP program. In the interim, the Obama Administration has gone off tilting at windmills about executive pay. Of course, if an institution didn't take TARP funds, the limits don't apply to them, and that includes some behemoths, like Goldman, Sachs. Use of the TARP funds we find out now has been for executive bonuses and dividends and not for net new lending. What a surprise! However, it gives politicians lots of press release and television sound bite opportunities. "We stuck it to those overpaid CEO's!" Meanwhile, the banking and credit systems are still in intensive care.

Bill Gross and others have emphasized the need to address falling asset prices, and that still has not directly been done, especially for mortgages, where the volcanic pressures really broke. Instead of fixing this problem, we are now talking about direct assistance to homeowners. Which homeowners will get assistance? How much? These are not economic decisions, but redistributive decisions, and we know how these work out, namely arbitrarily and unfairly.

It is amazing how many ill conceived and half-baked ideas continue to be talked about in the press. As we all get "issue fatigue," stimulus bills that represent not output creation but pure transfers get passed because we can't deal with the scale and complexity any more.

Gregory Bateson wrote, "There is an ecology of bad ideas, just as there is an ecology of weeds, and it is characteristic of the system that basic error propagates itself." (Steps To An Ecology of Mind)

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