The Ultimate Bailout Failure: Banks Decrease Lending Under TARP
As the economy continues to sink, the Wall Street Journal today documents an increasingly obvious fact: Most of the big banks that got a total of $148 billion in taxpayer money didn’t use it to make loans. Instead, lending activity at 10 of the 13 banks that received funds under the Troubled Assets Relief Program actually declined by 1.4 percent in the last quarter, the Journal reports.
So much for money well spent. The story also points out, using an analysis of the banks’ financial reports, what most people have come to conclude about TARP: It doesn’t work. From the Journal:
“It has failed,” said Campbell Harvey, a finance professor at Duke University’s business school. “Basically we have dropped a huge amount of money … and we have nothing to show for what we actually wanted to happen.”
But there’s more. The government’s decision to hand over the TARP money with no conditions also added to the decreased lending, the Journal said:
The fact that loan portfolios are shrinking at many of the largest TARP recipients underscores how few strings Treasury Department officials attached to the infusions. That has made it hard to prevent banks from using the money to pay dividends, make acquisitions and fund bonuses for top executives.
President Obama has pledged to overhaul TARP. There’s a lot on the administration’s plate already, but fixing TARP is going to have to be a high priority. One lesson here is that handing money over to banks and trusting they’ll lend it out is misguided. The government acted like an irresponsible parent in failing to spell out its expectations for the money. Another is that the government also never really explained what it wanted TARP to do: Was it to ramp up lending, or to get the banks in healthier shape?
If we’re going to hand over more taxpayer money to banks, either through TARP or other kinds of lending — and it looks like we’re going to have to, given the banking industry’s poor financial shape — we need to be clear about how the money should be used, why we’re doing it, and to provide the money in a process that is transparent enough to allow policymakers to correct problems along the way.
A basic guideline would be to take the current TARP blueprint, throw it out, and start over. Do everything the opposite of the way it’s been done so far. Anything less means more of the obvious: another failure and billions of dollars misspent.