TARP: A Word with Multiple Meanings
In layman's terms, a tarp is a piece of material used to cover and protect exposed objects or areas.
Here you see how my family employs a tarp to protect us from the elements during a camping trip.
In the current language of American economics, TARP is the acronym for the federal government's Troubled Asset Relief Program, led by the brilliant investment banker, Henry Paulson, who now serves as the nation's Treasury Secretary. TARP is the Fed's attempt to protect the nation from the collapse of our economy.
TARP is also a shifting landscape – in a statement today, Paulson announced changes in how he wants to invest those billions of TARP-assigned tax dollars. He's decided that purchasing illiquid mortgage-related assets is no longer "the most effective way to use TARP funds." He's now looking at shoring up the consumer credit market (because consumers need more debt in their lives) and "exploring ways to reduce the risk of foreclosure."
You can see his remarks here. It's an interesting example of a story that ebbs and flows with optimism and concern.
Paulson starts out on a happy note, stating that "the actions taken by Treasury, the Federal Reserve and the FDIC in October have clearly helped stabilize our financial system." (Happy news for the banks, but I'm sure the people at GM and Motorola and other troubled non-financial organizations don't feel quite the same joy.)
He then goes on to assert that "we have taken the necessary steps to prevent a broad systemic event." (Really? I thought TARP was necessary because we're in the throes of a "broad systemic event.")
He also acknowledges that TARP set a "land-speed record from announcing a program to getting funds out the door" – the Fed had announced plans on October 14th to purchase preferred stock in federally regulated banks and thrifts - and had sent $115 billion out the door to eight financial institutions in less than two weeks.
Speedy is good, I guess. I hope someone is just as swift at making sure these institutions are being held accountable for these funds - and that their executives are not jetting off to an expensive spa at our expense.
Thankfully, however, Paulson recognizes that "any future program should maintain our principle of encouraging participation of healthy institutions while protecting taxpayers."
At least the boss is aware there is a need to protect the people funding the plan.
But then he ties up the package in a wrapper of worry by saying things like, "our financial system remains fragile in the face of an economic downturn here and abroad...." and "...banks and non-banks may well need more capital given their troubled asset holdings, projections for continued high rates of foreclosures and stagnant U.S. and world economic conditions."
(But, phew, we've prevented that "broad systemic event" we were all so worried about.)
A Blanket of Money
One point I hope the banking experts in the Fed understand: that expanding credit to companies on the verge of collapse and to consumers facing layoffs doesn't really solve the problem. We need more than healthy banks. We need more than the ability to borrow more money.
Before we can buy, we need a paycheck.
We need healthy companies that can employ American workers, instead of lay them off by the thousands.
As it reads now, TARP is a big blanket of money covering up the exposed flaws in our system. But in focusing almost exclusively on expanding our ability to borrow, it seems to be doing nothing to actually fix the flaws that got us into this crisis.
And that's a problem that will continue to haunt us well into the future.