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NO, TARP was an awful idea and not a success.

Posted by Arkady K. On 11/07/2010

TARP WORKED!!!  Thank the lord.  Some of the headlines do a good job of capturing the level of ignorance that persists in the world of punditry. "TARP: A success none dare mention" one writes while "TARP's Success Proves Washington's Talent" writes another  Oh brother, TARP is continuing to bamboozle people to this day, perhaps we can clear it up once and for all.  By continuing to promote these falsities the writers are also promoting the savior Big Government and instilling within the American populace an idea that any crisis regardless of size can be defeated by the wisdom of our politicians.  These propagandists fail on both accounts, first out of common sense and second for economic reasons.

First reason - the common sense. Just because *some* banks have been paying TARP back with interest never made it a good idea.  My analogy is the following:  Imagine if Congress offered each unemployed American an opportunity to play for 1 million dollars through a game of Russian roulette.  The game is simple, you take a Magnum and put one bullet into it, spin the chamber, point the gun to your head and pull the trigger.  If brains do not fly across the kitchen table you collect 1 million dollars.   Let's imagine that the first five desperate people taking the offer get lucky and are 5 million dollars richer. That is in essence the level of argument that some are making in defense of TARP.

In our imaginary case, just because brain particles were prevented from flying due to sheer luck did not make the blatantly stupid offer a good idea!  TARP could have failed miserably and sucked out hundreds of billions of dollars down the toilet,  hundreds of billions that America did not have.  Despite that cheer leading, LA Times reports, TARP will cost 50 billion and is a net loser.  But the costs FAR exceed 50 billion, let me show you why.

TARP is an economic disaster.

Without banks, there would be no credit and without credit there would be no America.  So the story goes.    But all those who defend TARP are either ignoring or simply not understanding that TARP by itself would have failed.  There was something else that happened behind closed doors, something bigger than TARP and it was this action that ensured that our biggest banks remain 'solvent' - at least for a little while longer.  After my previous article exposing Ben Bernanke's insidious tax hike on America in the form of QE2 (Quantitative Easing II), some people correctly wondered whether there was a QE1.  Glad you brought it up, there indeed was QE1.

Go ask some of the defenders of TARP what they thought about QE1, most would be hard pressed to tell you about it.  No worries, I will!  700 Billion dollars in the form of TARP, was akin to placing a band-aid on a patient who has had his leg blown off, not a prudent way to stem the bleeding. The major bleeding was in the form of trillions of dollars of bad debt.

A lot of this bad debt was in the form of Mortgage Backed Securities (MBSs).  Think of these securities as bonds, bonds that pay a certain amount of interest based on the quality of the underlying mortgages.  These securities were rated by the major credit rating agencies like Fitch Inc. and Moody's Corporation and based on this rating were sold on the market to investors.  Even as the housing market ballooned and lending standards vanished, rating agencies continued to give high marks to many of these securities despite knowing that they were rating junk.  Eventually reality struck home and the overrated MBSs began to falter as the underlying mortgages collapsed turning the MBSs into worthless promises.  Why am I boring you with these details?

Because these are the very same instruments that brought down giants like Lehman Brothers and Bear Sterns, companies incidentally invested and insanely leveraged in this market.  Not to be outdone, Fannie and Freddie had almost three times the leverage of Lehman and Bear to this very same market.  In fact, about half of the MBSs in America are guaranteed by Fannie/Freddie with the other half by Commercial banks.  See where this is headed?  The fate of the MBSs would determine the fate of the institutions that either guaranteed these securities or were invested in them.  At the time TARP was issued there were trillions of dollars worth of MBSs on the market that nobody wanted to buy.  This meant that the banks were in peril of losing hundreds of billions as these mortgage backed securities were realized for what they truly were - worthless.  Worse yet, given the manner in which they were constructed it was impossible to tell which underlying mortgages were causing the problems and how to separate the bad apples from the good, it was just a giant pile of rot.  But this never happened, banks never addressed these poor investments and yet the banks survived.  How?  TARP?  Nope.

The Federal Reserve.


The Federal Reserve embarked on a program in 2009, that in total, purchased about 1.25 Trillion dollars worth of MBSs (and FHA Agency paper).  In other words, our Central Bank bought up all the securities and investments that nobody else wanted.   This was one of the actions known as QE1.  With what money? With Fed created money.  Yes, you read that right, the Fed printed money and bought securities that were created by Commercial Banks/Fannie/Freddie.  Nobody knows their value or how much Bernanke actually paid for them, how profitable they are.  So instead of taking deep losses and possibly declaring bankruptcy, banks used this money to make investments in bonds, stocks and commodities.  With fortune turning on a dime banks found themselves flush with cash and paid out a record 144 Billion in bonuses.  If you have not thrown up somewhere, then read the previous statement again.  Our Federal Reserve printed money to give to the banks, who then blew giant asset bubbles in stocks/oil/metals and padded their pockets with billions.  Yet economic ignoramuses are now touting the amazing success and the infallibility of our Federal Government.  Nothing could be further from the truth.

So what is the problem you are wondering?  The problem is that, despite Bernanke's foolishness and central planning tyranny, he did not actually want this.  He wanted to relieve the bank pressure by buying the MBSs with the idea that the banks would then turn around and make loans, not sit on the money.

The loans never came, instead banks are sitting on piles and piles of money.  Observe:


As you can see, plainly, commercial banks have parked their money within the Federal Reserve system and are enjoying the zero percent interest rates offered by their gracious host Ben Bernanke.   Observe that the reserves began accumulating mid-2008, which was reported in the media as a credit crunch.  The reason for the credit crunch is simple, banks knew they were potentially facing bankruptcy due to their exposure in the MBS market.  Instead of letting them survive on their own merits and purge the bad debt out of the system, Congress passed TARP and thus allowing Bernanke to move in one year later with his grand MBS purchasing plan.  Bernanke's desire at the time was to stimulate lending and encourage Americans to borrow their way into prosperity just like it happened since the 1980s.   To no avail, total loans have been plummeting:



Banks are simply not interested in lending and who can blame them.  With no real capital formation, no savings, no wealth accumulation there are no real lenders.  Both banks and businesses realize that there is no room to grow in this economy and that a deep meaningful contraction, debt default and the return to fiscal sanity is the only thing that will ever inspire a recovery.  Why oh why, don't people understand this simple concept!?

Instead the Central Bank has doubled down on his dangerous policies and instead of pursuing an economic expansion via the banking system, has now embarked on a more suicidal and undoubtedly unhinged approach of monetizing the Federal debt outright!   The major difference between these approaches is that the first approach would stimulate lending which would stimulate growth and generate profits, propping up housing prices. This would ensure that MBSs generate money which would then mature and roll off the Federal Reserve balance sheet as if nothing ever happened. Well, err, despite the obvious price inflation, the hope was that Americans would forgive and forget in the face of a 'recovery'. This never materialized.

So while the banks sit pretty thanks to the generosity of our central banks what does this mean for the average American?  Very simple, the working and middle class and our seniors suffer miserably.  The senior citizens to whom this nation promised an income via Social Security are being quietly snubbed out.  You see, as Bernanke printed his 1.25 Trillion dollars thus infusing the world with cheap dollars, the value of the dollar dropped and prices in energy and food climbed.  Conveniently for the US Government, the Core Price Inflation index EXCLUDES those very items.  And so they can safely claim that price inflation is non-existent and thereby refuse to make cost of living adjustments to our senior citizens.  How nice.  Sure is a great way to save the bankrupt social security system, is it not?   Yet of course these same senior citizens continue to vote into office liberal politicians who promise to always protect social security!  Of all the lies the Government makes, this has to be one of the most egregious and evil.

These same liberal politicians also claim that they are looking out for the best interest of the working and middle classes.  Another grandiose lie as they continue to defend the Federal Reserve and continue to accumulate insane amounts of Federal debt.  Yet look who suffers:


So while the wealthy pad their pockets with bonuses, the poorest among us are left to squeak out an existence.  This is America?  The wealthiest and greatest nation on earth?  No, this is a perversion of the greatest magnitude.   The above chart is the true cost of what our Federal Reserve and our Congress are doing.  If you walk away with nothing else, let this image burn into your mind forever.

In conclusion, as you can see, TARP never worked.  It was the printing of money by the Federal Reserve at our expense that saved the banks.  Yet the saving of the banks did nothing for our struggling economy and 17% real unemployment.  Had it, then Bernanke would never have announced QE2.

This is the legacy of fiat valueless money, central banks, tax and spend policies and a centralized government drunk on power.  This is precisely the reason that any member of Congress who voted for TARP and stood idly by while the Central Bank pillaged our way of life cannot lead us.  People like John Boehner and Eric Cantor, who currently represent the GOP leadership.  Instead we need to embrace those that *did* understand it, starting with a  list of current congressmen capable of true leadership. Observe as one of these congressmen questions the actions of Ben Bernanke:

"It is no crime to be ignorant of economics, which is, after all, a specialized discipline and one that most people consider to be a ‘dismal science.’ But it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance.” - M. Rothbard