This weekend the TARP entered generation three: an asset guarantee program. Just a couple of weeks after announcing that the TARP will not undertake asset purchases, the TARP is being used as a stop loss mechanism for Citi. While the move is not bad, per se – although it is hard to believe that it will be sufficient given recent releases suggesting UBS will have to go back to the trough – it is just another throe of inconsistent policy over the past year-and-a-half.
Recall the laundry list of “creative” policymaking. From Treasury’s MLEC SuperSIV to HopeNow, the BearStearns/JPMorgan bailout, the Fannie/Freddie, Lehman and AIG debacles, and now TARP I (asset purchases), TARP II (recapitalizations), and TARP III (asset guarantees). Note, however, how none of these address the financial system as a whole but only treat individual institutions or idiosyncratic problems.
Systemic solutions, i.e., reliance on bond ratings, off-balance sheet treatment of both securitizations and derivatives (including CDS), and CDS counterparty exposures (not clearing mechanisms) have still not been approached. Nor can they be expected to be approached with the torch of leadership being passed from Secretary Paulson to another Wall Street Insider, Timothy Geithner. Banks like Geithner (indeed, they hired him to be President of the Federal Reserve Bank of New York) because he delivers the bailouts they like without the nasty stabilizing regulation that may hurt profits. When Washington figures this out, there may be hope.
Perhaps there is hope to be found overseas. I am going to turn my attention to Europe next week, testifying at an EU Parliament work session on Ratings Agencies. Nonetheless, the Commentary will not publish this Tuesday due to travel, and will resume December 9. Happy Holidays to all, and give thanks for real economic analysis.