Tuesday, October 5, 2010

TARP Terrorized the Economy

By John F. Wasik (Reuters)

The bailout was a bust for most American taxpayers

Was the bailout of the U.S. banking, auto and insurance industries worth it?

As the Troubled Assets Relief Program comes to a close, I won’t be popping any champagne corks. The Federal Reserve and U.S. taxpayers are still owed at least $2 trillion and at least two black holes remain in the bailout scenario.

The conventional wisdom is that life as we knew it was preserved and a 1930s-style depression (or worse) was averted.

Yet for millions of Americans, the bailout hasn’t helped them a bit. They are still punch drunk and often jobless from Wall Street’s and the bankers’ Las Vegas benders.

Former Goldman Sachs manager and author Nomi Prins tells me “Main Street is not better off, because it did not receive the lion’s share of the grandiose focus, subsidies, monies and removal of toxic asset aid that the banking sector inhaled into the top levels of their institutions.”

Prins, who authored the definitive autopsy of the meltdown in “It Takes a Pillage,” challenges the idea that the bailout money ever trickled down to people who needed it the most.

“That’s why defaults, delinquencies, foreclosures, bankruptcies and unemployment rates have risen — none of which is an indication of Americans doing better, even as banks repaid TARP and are eager to put the whole ‘mess’ behind them,” Prins said.

You don’t have to look too deep into housing forecasts to see that the U.S. home market still resembles a typhoon-devastated country.

The shadow inventory of homes that could be reverting back to lenders is staggering. There may be as many as “four to 12 million foreclosures yet to come” touching nearly every neighborhood in the country, according to real estate author Ilyce Glink.

One of the reasons the housing debacle seems like a bottomless pit is that the widespread unemployment triggered by the meltdown is pushing ever more homeowners into foreclosure. The American Dream is shattered for them.

While the stated jobless rate is hovering around nine percent, it’s really 12 percent to 20 percent when you include inner-city residents and those who have stopped looking for work and no longer receive unemployment checks.

Meanwhile, the two entities that were supposed to lend stability to the housing market and middle-class neighborhoods — Fannie Mae and Freddie Mac — are on life support.

Will the Obama Administration wind them down, buy their bad loans or simply privatize them? We probably won’t know until well after the November election. In the interim, Prins estimates that taxpayers are on the hook for a nearly $7 trillion implicit guarantee of the mortgage companies and their debts.

Am I ignoring TARP’s silver lining? Financially, it wasn’t a complete bust and taxpayers made money on the funds repaid. The largest financial rescue in history has produced some dividends for the U.S. Treasury. Big banks, Wall Street, goliath insurer AIG, the mortgage market, GM and Chrysler all got loans and will survive — at least until the next crisis.

On paper, taxpayers reaped anywhere from a 10.2 to almost 20 percent return, according to The Banker magazine. That’s $6.8 billion in dividends from institutions like Bank of America, JP Morgan Chase and Wells Fargo.

Along the way, money market funds got rescued, Fannie and Freddie became wards of the state and the world’s largest banks and insurers were saved from their rapacious derivatives trading.

The true measure of whether the $8 trillion pledged thus far on the total bailout was well spent, however, is gauged in lost opportunity cost and unaddressed social capital needs.

Could the financial rescue money have been better spent fixing some $2 trillion in dilapidated levees, bridges, water systems, dams, roads and schools?

Would we have been better off investing the TARP funds in alternative energy, our moribund public transportation infrastructure, curing cancer or providing world-class educations for children struggling to compete in a global economy?

It’s painful to say that while the bailout perhaps saved millions of jobs, it did nothing to create new ones — save for a handful of bureaucrats counting the billions that went to a fortunate few.

John Wasik is also the author of “The Cul-de-Sac Syndrome: Turning Around the Unsustainable American Dream.”

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