A RANDOM WALK TOWARD HOOVERVILLE

11/14/08

Back in September, when Hank Paulson was pushing for what is now called the TARP (See the digression at the end of this piece.), he was telling us how absolutely essential it was to get bad assets off the books of the nation’s titanic financial institutions in order to “unclog the arteries” of the financial system. Almost as soon as the Congress had written him a $350 billion check (with another $350 billion “on reserve,” as we used to say in college in a completely different, but less toxic, context), he began to move away from that febrile argument and starting dishing out the money to comparatively healthy financial institutions in the form of very attractively priced (from the issuers’ standpoints) preferred stock. The he doled a chunk out to the ever vigilant AIG while its executives vacationed (oh, I’m sorry, “conferenced”) in sunny climes of which the check writers could only dream. Finally, on Wednesday of this week, Mr. Paulson finally gave up the ghost and simply admitted that the urgent national priority of not even two months ago is not so important any more. Those arteries which desperately needed the financial equivalent of the Roto-Rooter man can indeed remain clogged and the economy will do just fine as long as we invest more money in banks and Wall Street, encourage the type of lending that got us into this trouble in the first place, and lend succor to homeowners who bought more house than they could afford and now can no longer make, or have decided not to make, their house payments. Those of you who were responsible and kept up with your payments, even when it was painful and you could have used the money for something else, shut up and pay. But I digress.

The evolution of buying toxic assets from an urgent national priority that needed $700 billion RIGHT NOW only two months ago into something that is not as important as fortifying relatively healthy financial institutions and assuring the free flow of the type of credit that got us into this soup in the first place reiterates a point I have been making for months. People, and especially “experts,” are fond of telling us that another Depression is impossible because the government now has a dizzying array of tools at it disposal that are designed to thwart an economic catastrophe. However, I have been arguing, and continue to argue, that when the government uses the wrong tools, or clumsily misuses the tools it is attempting to use, it will only serve to exacerbate the problem it is trying to solve and thus, given the government’s size and resultant immense and immediate impact on the economy, might hasten, rather than thwart, the downward journey into economic dystopia.



Now, on a (thankfully) lighter note, sort of a silly, but nevertheless insightful, point of digression…

The program that I referred to as RTC II back when it was being proposed in September originally came to be called the TARF (Troubled Asset Relief Fund). I thought that was an especially apt name, given the obvious rhyme for TARF. However, perhaps catching this oversight, the “designers” of this program quickly and surreptitiously renamed it TARP (Troubled Asset Relief Program), and TARF quickly evaporated into the mists of history. While I thought that TARF was especially appropriate as a moniker for this abomination, TARP also serves very well. After all, a tarp is a huge, ungainly opaque cloth used to cover up things, right?
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