The Banking Crisis: TARP This
The bailout hearings on Capitol Hill were not surprisingly about the crisis in banking. The bailout has appropriately become labeled as “TARP,” which is short for Troubled Asset Relief Program. From a taxpayer standpoint, I have to think someone has sense of humor (ironic) in Washington DC when it comes to acronyms. When I hear the word “tarp” I think of a piece of cloth, the short form of “tarpaulin,” which Webster’s dictionary defines as “a piece of material used for protecting exposed objects.” (I think there are an awful lot of “exposed objects” in Washington DC—and elsewhere for that matter.) The TARP seems to be concerned with the banks located on Wall Street and not Main Street, but the defaulted mortgages and other bad debts (including student loans and credit cards) that are being talked about are from Main Street America.
Neighbor, Need a Hand or aTARP?
There are an awful lot of people with exposed “assets.” Unfortunately, they are probably our neighbors, our coworkers, and other people we know. They’re not bad people, but people caught up in the frenzy of the real estate wealth “boom” that brought with it speculators, flippers, and an ever-increasing motive to keep the game going and valuations climbing. The real estate bubble in housing (and commercial real estate) just kept rising and growing … until one day … POP! Someone didn’t want to play the game any more and asked for real money and real valuation to go with the risk. And so it goes; when the market stops and no one wants to continue the game, then everyone starts to look behind the transactions to see what is really there. Things get revalued to their “real” value, and you have to start paying real money to make the difference between inflated or overstated prices that were driven by speculation and the real-world Main Street value. The gold bricks end up in someone else’s bank and you get a lead balloon to hang onto. Everyone pays the price and the TARP may not be big enough to cover everything and everyone … although many are trying.
The Music Stopped; Now What?
The tune that has been playing for the past several years is that you can “get rich quick” in real estate. You could. Some did. Some cashed out. Others didn’t. Those who kept moving and traded up viewed the home as an investment that could only go up, and not a home at risk. Buy now and buy later … move frequently and cash out on your investment … go for more and get more equity out with each move. Don’t think about paying off a mortgage; this is an investment! Keep moving and reinvesting!
There’s a problem with viewing your home as an investment that you keep cashing out of and reinvesting, moving you and your dollars. You’re not building real equity in, but moving from one home to another and “building the equity” through increasing appraisal values; but these investments don’t have guarantees. So, we all know the problem now: When investment values go down and the market falls, you have an investment that has lost value and your mortgage requires paying down … and this is an investment you can lose that takes the roof from over your head and the rug out from under your feet!
What is Your Net Worth?
Your net worth: That is all “they” told you to worry about. Did they talk to you about how quickly your net worth can go down when the main assets in your portfolio (e.g., real estate and stocks) are impacted by the volatility of a market that was playing the same investment game? You may be holding the bag on declining investments, because much like Enron (and its compatriots of that era), someone wasn’t “minding the store,” nor was there an understanding that the inventory in the store was being resold when it was damaged, overstocked, poor quality, defective, or otherwise not suited to be in the store in the first place. But wait: I do believe the order for some of the inventory was mandated by Congress. So the net worth of your assets was, in effect, distorted by actions by the Federal government. Hmmm … how unusual—NOT!
Regulations, Oversight and Congress to the Rescue? I Don’t Think So
Call me a skeptic, but I just don’t believe that our Congressional leadership can intervene to “save” us. I do believe they can spend to put a transfusion into the body of the capital markets. I think those types of interventions in medicine are called heroic measures, giving the doctors time to truly save the patient. I just want to know if the patient can be saved? Or should there be a do not resuscitate order? (Or at least a call to amputate the parts that are putting the patient at risk?)
When I hear “they are too big too allow to fail” then why have they been allowed to become so big and so integral to our system that we cannot let them fail? IF they are so important, why wasn’t someone watching them more closely to ensure that they could not fail and would not be in this position? If they are more important than a free market, then why aren’t they monitored more closely?
First came the investment banks, “real” banks, and automakers. Who’s next? The retailers who will post dismal—if any—profits (more red than green) from the 2008 holiday season? Why not? Let’s TARP them too. I bet Congress can. What do you think? How much can they TARP?
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