By Chidem Kurdas
It is hard to find another example in history of so much taxpayer money spent with so little understanding as has been the case with the Treasury’s Troubled Asset Relief Fund—though the new stimulus package may involve even more money and less understanding, as Mario’s posting on the Macroeconomic Knowledge Problem suggests. A few questions posed by Anna Schwartz offer remarkably lucid insight to the TARP mess.
TARP was originally supposed to relieve bank balance sheets by buying financial paper for which the demand has disappeared. Instead, the first installment was used to buy the equity of financial companies, making the federal government a big shareholder. Then the automakers went to Washington with their hands out and got a piece of TARP. It is not clear how the Obama administration will spend the rest of the money, but they’re speaking about channeling it to households that are defaulting on mortgages. Meanwhile, toxic debt continues to weigh down bank balance sheets.
Anna Schwartz, of course, is the co-author with Milton Friedman of A Monetary History of the United States, 1867 to 1960. In a recent NYT op-ed column posing questions to Treasury secretary-nominee Timothy Geithner, she raised three issues. Her first query – why he did not deal with Citigroup’s problems as the head of the NY Fed, the primary supervisor of the bank – should make Mr. Geithner squirm. Click for column
The other two questions highlight the Achilles’ heel of TARP policy. She asks what criteria was used to pick the companies that receive taxpayer largess and suggests an alternative. The Resolution Trust Corporation, which bought and eventually sold off the assets of savings and loans in the 1980s, can be revived to do the same with financial paper. Ms. Schwartz wants to know if Mr. Geithner would request Congress to revive this institution, “so you would not have to decide which companies to save and which not to save?”
By buying equity or otherwise intervening in certain cases but not in others, the Fed and the Treasury have not revived the banking system even after spending hundreds of billions of dollars. The policy has instead sowed further confusion. So this approach was a bad mistake. The right thing to do is to specify the assets that are at the root of the financial malaise and take them over. That does not require picking companies. It directly addresses the cause of the bank freeze.
We’re lucky about one thing—that Ms. Schwartz is around to shed light on murky policies.