The Fall of the House of TARP: Time for Plan B

I am not surprised that the Troubled Asset Relief Program (TARP) failed.

The paper that I put out on Friday detailed the numerous problems with the TARP. 

My paper argued that the TARP had at least three major flaws.

1.Buying these toxic assets at ‘hold to maturity’ prices is throwing away taxpayer money – it is tossing good money at bad. I argued that the assets should be purchased at a much lower price consistent with a three-to five-year holding period and an assumed recovery in market conditions. At these prices, financial firms would be pleased to sell – and the taxpayers get to buy at a price where we can make a positive return.

2. I pointed out that the subcontracting of the $700 billion program is a mistake. There are too many conflicts of interest – it is best for the Treasury to manage this internally. 

3. I argued that the TARP would not necessarily increase the amount of lending in the economy. What we really need is for banks to be willing to make loans to small to medium business – the firms that are having the roughest time getting financing. Small and medium businesses are the key driver job creation. I argued that an economy wide investment in the common equity of banks would provide an instant capital injection that would target lending.

The TARP would have taken months to work through. It is a mathematical nightmare just thinking about how to value some of these toxic securities.

My paper argues for a comprehensive approach to dealing with the credit crisis that targets the behavior of the institutions. The bottom line is that we need to jump start the credit process in our economy. So far, we are just putting one fire out after another. We need a comprehensive policy that deals with financial institutions, the credit available to non-financial companies – and the consumer which determines almost 70% of GDP.

While the vote is still open in the House, I think it is time for Plan B. I certainly hope that the next plan will cast a wider net and deal with all aspects of the problem.

The latest version of Harvey’s proposal is available at

http://faculty.fuqua.duke.edu/~charvey/Crisis/Harvey-v3.pdf

This entry was posted in Finance and tagged , , , , , . Bookmark the permalink.

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>