January 27, 2009

TARP Quotes

Here are two quotes concerning the federal bailouts from Rep. Alan Grayson (seen below with some sweet sweet facial hair) that I found to be worthy of further thought. These are from an interview in Salon.

"How can anybody be other than angry to see something like this happening. If they took that same money, $4,000 for every man woman and child in American, and they simply wrote checks to people that would end forclosures, it would stop the drop in the housing market, it would put a significant dent in our unemployment problem. Instead they take that money...they lend it to people who we don't know, they get back stuff we can't understand and we're the ones left holding the bag."

"What we're doing in reality is we're lending the banks billions upon billions upon billions of dollars in the hopes that they will lend it back to us. I say let's cut out the middle man."

Greyson's idea to "cut out the middle man" in the financial crisis is something that I've been pondering for awhile now. Banks and other financial institutions use money to make money. They give people and organizations money in form of loans and they collect a price for this service in the form of interest. Money is the product that they produce and sell. Does giving financial institutions money so that they can turn around and loan it at profit if they so choose make sense? Of course, representatives of the Fed (Federal Reserve) have been saying that they are actually loaning this money instead of merely donating it. But, this is little more than vague assurance since they refuse to disclose exactly what they're doing to anyone.


Let me put this even more simply. There is a cycle of money that is easy to follow.

Phase 1: The government gives/lends money to the banks.
Phase 2: The banks lend that money to people and/or businesses that need money.
Phase 3: These people and businesses give money to the government in the form of taxes.

Now, given the above cycle, here are the points that I find interesting. Caveat: Some of the following rehashes what I say before this update.

First, I'm still unsure to what extent the government is giving vs. lend money in phase 1. Actually, I think that this distinction has been made intentional unclear by the Fed . What I'm quite sure of is that if the money is lent to the banks it will not be returned in full and certainly not with interest.

Second, while the money is coming from the government of the United States, the distribution of this money is controlled by the Fed which is best described as a quasi-governmental institution. The Fed has members appointed by the president and confirmed by the senate but also has members and significant input from it's member banks. Again, I'm no expert on how the Fed makes decisions but I'm pretty sure that it is a hybrid institution of both the government and the banking system. These are the people that are giving/lending money to the banks.

Third, and probably most important, the banks lend money at interest. I mentioned this point in the original post but I just want to highlight it again here. Collecting interest is like skimming money off of the cycle. Or we could think of the cycle as an engine that drives profit at the banks.

Fourth, the banks have more control over lending money than any other part of the cycle. As the post illustrates, Congress is having trouble even simply accounting for how their money is spent. When people and business give their tax money to the government, their control over its distribution is limited to their ability to elect the government and advocate for its policies.

Fifth, apparently, there aren't even assurances that the money given to banks and other financial institutions is being loaned out at all. If they aren't even loaning it, God knows what they are doing with it but it's a good bet that it's something more profitable than merely loaning it out at interest.

This is how I see the state of the TARP program and the cycle of money that it generates. If anyone disagrees with my extremely simple minded analysis, I would be happy to hear alternate viewpoints.


Vanessa said...

Jon Stewart suggested this same thing last night while interviewing Gwen Eiffel. It definitely sounds like a superior idea to me. I know I could use a check to keep paying my mortgage. If I can't sell soon, I'm looking at foreclosure and ruined credit for years to come. So how's this whole stimulus thing supposed to work again? Oh yeah, banks lending people money. Well, banks don't lend money to people with bad credit.

the unbeatable kid said...

Yeah. Let the banks decide who deserves government money. Because if anything, they've proved themselves to be experts and lending money.

Kelsey Atherton said...

The tricky thing about this, though, is that banks more or less need to be able to lend money at interest. Without that, banking itself doesn't work, and more broadly, money doesn't work. The value of money is in the interest it could be earning sitting in a bank versus it's immediate purchasing power now. High interest means lots of people saving money, which banks can channel directly (through loans) to investment, which gets the economy going again, which raises the value of money in the present, which lowers interest rates. The problem is not banks - the problem is so much taxpayer money going to banks by way of the federal reserve. The nice thing about the reserve is it's independence - there are a host of problems with it, but that independence keeps politicians from playing with it for fun. However, it is dependent on banks, who have a profit motive, and that is often in conflict with the national interest.

The more reasonable way around that is to turn the Federal Reserve back into a nationalized bank, with protections guaranteed. And loans set at affordable minimums, backed up the government itself.