22 December 2008
What exactly was all this U.S. Federal bailout money—the Temporary Asset Relief Program (TARP)—supposed to relieve?
Let’s review the highlights
First of all, remember back when there was a housing bubble—the one that burst? That was followed by mortgage defaults and foreclosures, which then led to major losses for financial institutions that were dealing in mortgage-backed securities. When those losses caused their balance sheets to crater, they tried to stop the bleeding by bringing lending to a screeching halt. And that resulted in a freezing up of the credit markets.
Thus the whole financial bail out plan was supposed to thaw out the frozen credit. But did it? No. Why not? Because nobody knows where the money went. Even the bailed-out banks say they can't track where they're spending the money, but even if they could, they aren’t telling us.
Then there’s the auto industry. Bush has left a $13.4 billion parting gift to G.M. and Chrysler and they have until March 31 to produce a plan for long-term profitability, including concessions from unions, creditors, suppliers and dealers. In February, another $4 billion will be available for G.M. if the rest of the $700 billion bailout package has been released. But then what?
Toyota and Honda, long considered to have the state of the art manufacturing facilities, not to mention the most appealing designs and reliable technology, are also in trouble. Toyota just announced its first operating losses in 71 years. If these two giants are faltering, one wonders how GM and Chrysler expect to bounce back. Meanwhile, where will all the bailout money go?
It’s not just the U.S. economy that needs bailing out
Ireland's finance minister just announced plans for a $7.7 billion bailout of three leading banks because of reckless property lending practices during Ireland's recent housing boom. With Ireland facing a deepening recession, Allied Irish, Bank of Ireland and Anglo-Irish all need a boost to their cash reserves just to stay alive. The banks now face government control. But will it be enough to stimulate a healthy economy for Ireland?
China’s economy, which has been affected by a sharp decline in demand for exports to the U.S. and Europe, is teetering amidst job losses and worker protests. They’ve cut interest rates for the fifth time in four months and in November they announced a $586 billion stimulus package. That may help boost the economy, but only if the country can survive long enough for their planned infrastructure projects to get moving sometime in 2010.
Why TARP failed
Excuse our naiveté, but we thought bailouts were supposed to come with defined preconditions and oversight and that the benefits would filter down to the pockets of the consumers. We were also under the impression that stimulus packages were supposed to put cold hard cash into the hands of consumers so they could start spending the economy back into motion.
We’ve all witnessed the results of having little or no bailout preconditions and the oversight that never was—failure and vaporized money. We won’t know the details of Obama’s stimulus package for a while, but whether or not consumers can be encouraged to actually spend the money is unknown. A stimulus package may also end in failure.
There is simply no confidence left in the markets, in financial advisors or economists. And just as we were mending our wounds and thinking maybe we’d seen the worst, the Madoff scandal broke, and with it, the sinking feeling that the worst may still be coming.
Even though Obama seems to represent change and optimism, it’s going to take some time for us to be able feel confident in governmental decisions again. So far, none of the bail out and promises of stimulus packages have had any effect on turning the world’s economy.