American Elephants


TARP Inspector General Blasts TARP! by The Elephant's Child
February 1, 2010, 10:02 pm
Filed under: Capitalism, Economy, Law, Taxes | Tags: , ,

The government’s Special Inspector General for TARP yesterday blasted the bailout program in an unusually harsh report. (224 pages, but the executive summary is short and interesting).

TARP, the Troubled Asset Relief Program, was designed as a vitally important part of the Federal Government’s response to the economic crisis.  It was supposed to deal with all those packages of sub-prime mortgages that caused the financial crisis.  Neil Barofsky, the Inspector General, is the watchdog who oversees that moneys are spent as they should be and that the program is performing as it was designed to do.

Early TARP funds  invested huge sums in banks, and most of the largest banks have repaid their TARP funds, so in some cases the Treasury— and thus the taxpayer —  has turned a profit. [These are the same banks that Obama now wants to tax as a reward for paying back the loans!]

But, Mr. Barofsky charges,  TARP has not only failed to meet it goals, but that — unless there is change, it may have made things worse.  The market, because of the bailouts, is “more convinced than ever that the Government will step in as necessary to save  significant — Too Big To Fail — institutions.”  This creates a moral hazard through what he calls a “heads I win, tails, the Government bails me out,” mentality. The extension of TARP for another year reinforces that moral hazard, by “permitting Treasury to maintain a war chest of potential rescue funding.”

The IG also expressed concern about the housing market, stating that the federal government’s concerted efforts to support home prices risks re-inflating the housing bubble.  The answer is to make failure a more feasible option for all institutions, forcing them to bear the cost of their own actions.  Bankruptcy and Capital Standards should be amended to cope with financial institutions that are “too big to fail.”

The thing to remember is that the federal government’s Inspectors General are on our side, helping to make  bureaucracies do what they are supposed to do.  The bureaucracies don’t always like that, and Congress doesn’t always like the reports of Inspectors General.




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