There seems to be an overwhelming number of Congress men and women, from both sides of the aisle, as well as administration officials, who now are completely convinced that a gigantic new stimulus package is needed now and should continue into the foreseeable future. Sure there are a few a few holdouts – “Some half a dozen Republican senators who voted for the financial rescue in the fall tell CNN [Jan. 14] that they plan to oppose it this time” – but the consensus is building. Nevertheless, even with this seeming uniformity, they all scream foul at the failure to account for the immeasurable impact on Treasury’s deployment of the first half ($350 billion) of the TARP bailout money, which has pretty much left the credit markets frozen, and are quite divided as to how to effect the next stage.
Other smaller bailouts, such as the capital injected into the Detroit-based automakers, seem to be missing their targets as well – people aren’t buying the cars despite the cash infusion; General Motors probably won’t meet the required benchmarks attached to its funding package (which could force a reorganization under bankruptcy law), and Chrysler’s numbers are so bad that experts see little hope of saving this brand.
What happened? The January 14, 2009 New York Times: “As of [January 13], 257 financial institutions in 42 states had received $192 billion in capital injections from the Treasury’s Troubled Asset Relief Program, or TARP, out of $250 billion set aside for this purpose. Seven giant banks — like JPMorgan Chase and Citigroup — have received more than 62 percent of the total so far, and have gotten most of the attention.” But the Treasury released money indiscriminately, often to smaller banks that were are the verge of collapsing, so instead of reviving the credit markets, these institutions used these funds to shore up their internal balance sheets instead. Other more stable players used this capital infusion to acquire competitors and grow their long-term values.
A lot of these faltering banks, many local and regional independent institutions, had made a plethora of bad loans that actually led up to the meltdown, and even if they could deploy their capital to make loans, their communities are so ravaged that their borrowers are simply too risky to merit the risk of further lending. The Federal Reserve, by reducing the discount rate (which is the rate FDIC banks can borrow from Fed) to near zero, made the lending capital available, but faltering banks had little in the way of reserves to access these funds.
As President-elect Obama has called upon the Bush administration to release the second half of the TARP funds (which has been approved by the outgoing government), Congressional resistance to various alternative uses of these monies is rising. Mr. Obama seems to believe that this money should be deployed into the failing mortgage-housing market, but again, there is a split as to how to implement this overwhelming task.
Does the government directly subsidize the “principal and interest” resets that are so basically required? Even to homeowners who should never have borrowed in the first place? Or do government agencies continue to focus on further solidifying financial institutions – arguing as Fed chairman Bernanke has that even if it appears that we are favoring the financial sector over all others, credit is the life blood of our economy which needs a priority fix? Speaking at the London School of Economics, Bernanke supported the President-elect’s stimulus efforts, but added: “"fiscal actions are unlikely to promote a lasting recovery unless they are accompanied by strong measures to further stabilize and strengthen the financial system."
The January 14, 2009 Washington Post: “Among other steps, Federal Reserve Chairman Ben S. Bernanke and vice chairman Donald L. Kohn suggested taking troubled assets off the books of banks -- a strategy that Fed officials backed before it was abandoned months ago -- and also using some of the money to help homeowners at risk of foreclosure… They said the government could buy up bad assets that banks hold or otherwise protect them from further losses.” The Post noted that Bernanke “also spelled out alternative approaches he had not aired before: insuring banks against further losses on those assets in exchange for stock or creating a "bad bank" that would hold the bad assets.”
In the end, voters are going to mandate accountability, and since almost 70% of America’s economic activity is at the grassroots, consumer level, ordinary human beings, not just the business world, need to know that the job loss will stop sooner rather than later that the government is going to solidify “America’s asset” – homeownership – with a sustainable, if subsidized investment. As negative retail sales numbers slammed the stock market on January 14, the Associated Press reported: “The weakness in consumer spending has been a prime contributing factor to the economy's current swoon and analysts say they don't see that turning around soon. They predict the current recession, already the longest in a quarter-century, will continue at least until the second half of this year.”
While shoring up financial institutions may be a necessary evil, without consumer confidence, without the economic demand from this vast grassroots economic force, we will only be supporting the ability of the biggest surviving institutions to buy an ocean of distressed assets at fire sale prices, at the expense of most of us.
I’m Peter Dekom, and I approve this message.
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