What Benefit From The First $350 Billion in TARP Funds?

On Thursday afternoon the US Senate voted to release the remaining $350 Billion in TARP funds to the US Treasury, but only after lawmakers took their opportunity to offer commentary regarding the Bush administration and how Treasury Secretary Paulson has handled the first $350 Billion released last year. There were repeated requests for greater accountability and the mandate that ‘this time, we need to know where the money is going’, as though the distribution of TARP funds had taken place without absolute transparency. In reality, the House and Senate, like the Treasury, know precisely to which institutions TARP funds were released, in what amounts, and what those institutions have done with 100% of their resources in the mean time. We’re talking about publically held banking institutions which are required to abide by strict reporting requirements and are subject to constant regulatory examination. In virtually every case, TARP funds were provided in exchange for dividend yielding, preferred stock in the organization to which the funds were distributed. This has amounted to a recapitalization of the US banking system and has been accompanied by an extraordinary loss of shareholder value as taxpayer funds have been used to strengthen publically held financial institution balance sheets.

What these lawmakers are attempting to communicate is that they don’t approve of how the funds have been handled – which is their right. What they’re actually representing is that they’re limited knowledge of finance and economics makes it difficult for them to comprehend the benefits our economy has received from the distribution of TARP funds. Much of our population is in the same position, though perhaps without the forum from which to cast opinion.

In September and October of last year Dr. Ben Bernanke effectively warned that the credit complex in our country had virtually collapsed, and that we were on the brink of a financial malaise that would rival that of the depression of the 1930’s. That was now four months ago, and our banking system, though still under tremendous pressure, has improved substantially. Banks are once again lending to each other, credit is being extended to businesses and consumers at levels below those observed pre-2008, but well beyond what was experienced in the nearly frozen markets of July-November 2008. The ‘yield curve’ has reversed its inverted posture and become steep enough to foretell possible stock market improvements in 2009 and the TED Spread (an indication of banking industry confidence) has improved dramatically.

It is likely that the leadership of both the Treasury and Federal Reserve underestimated the difficulties we faced until we were on the verge of disaster. Likewise, it is clear that they’ve made adjustments to operating plans as their vision of the financial market’s stresses became ever clearer.

A recession is not a disaster, a depression is. For our lawmakers, and perhaps many of the rest of us, to understand what benefit we’ve received from the TARP funds already disbursed, we may be well served to remind ourselves of what the Depression was like for tens of millions of Americans. Timothy Egan’s The Worst Hard Times, and Amity Shales’ The Forgotten Man offer sobering reminders of what we may well have experienced had Paulson and Bernanke not acted with prudence and foresight – they may not have been perfect in their assessment or executions, but they have been relentless in their pursuit of solutions to extraordinary problems. Though the pressures of unemployment, home foreclosures, and loss of investment capital wear heavily on our citizenry, the current level of stress is insignificant compared that experienced by residents of the mid-south who survived the ‘dust bowl’ period, or those living in many of the US’s industrial cities where entire industries collapsed.

The 1930 US Census records our population at over 123 million persons, of which the Depression forced unemployment on some 12 million adult men and women, or roughly 10% of the entire population (over 25% of the adult population at the time). In 2000 there were some 291 million people living in the United States, 11.1 million of whom are unemployed today, representing an adult unemployment rate of 7.2% and an overall level of unemployment of over 3%. Though current forecasts suggest that adult unemployment levels in 2009 will almost certainly increase to upwards of eight or nine percent, the economic impact would be incomparable to that of the 1930’s.

The Obama economic team’s plan for the use of the next $350 Billion in TARP resources and perhaps an additional $800 Billion or more in stimulus funds includes restoring millions of jobs in private enterprise, creating millions more in the public sector, and propping up the housing market, and thereby, credit markets. None of which would be able to executed had the banking industry not been given the lifeline extended through the initial TARP disbursals.

With the US Government now having standing as both regulator and shareholder in the largest financial institutions in the country, we have all but nationalized our financial system – something Karl Marx foretold in the mid-1800’s. Marx and Engals asserted that Humanism (a term used to describe pre-capitalistic economies) would naturally give way to Capitalism, which would ultimately fail under the weight of an over-leveraged banking system and ultimately evolve into Communism. Though we may entirely dismiss many of Marx’s theories and motivations, it is uncomfortable to see an eerily similar progression of what has been a free-market-capital oriented banking system and economy.

I was reminded yesterday that I tend to be an optimist when looking at our economic future. Very true. Who would want to be anything but? Likewise, I am confident in the strength of our free market society and our resolve to dismiss central planning systems for democracy and freedom. With the inauguration of Obama as the 44th President of the United States in several days, the Executive and Legislative branches of our government must focus on reversing the recent ‘free market nationalism’ direction of our economy and restore the economic health and balance only available through Democracy and Capitalism.



Consumer and Producer Price Index, Retail Sales, and Personal Income Considerations

The Consumer and Producer Price Indexes (CPI and PPI respectively) were released overnight and both evidence retreating wholesale and retail price levels. The CPI declined by 1.3% in suburban markets and .7% in urban markets in December, while the PPI fell nationally by 1.9%.

Earlier this week, recently released December retail sales figures were labeled grim, and undoubtedly reflected the economic pressure felt by consumers. However, when adjusted for price decreases made sharper by early and heavy retail discounting and decreases in energy costs, the actual level of consumer purchasing will likely represent a more robust year-end than previously expected.

Inflation-adjusted personal incomes actually rose 2.9% in 2008, contrary to many published reports, despite the huge income and portfolio value declines experienced by more affluent investors.


Signature Update is offered by Richard Haskell, Managing Director, Signature Wealth Management