The New York Times reports another Trillion Dollar package:
Banking chiefs, who have come under sharp criticism for not making more loans even as they have accepted billions of taxpayer dollars to prop themselves up, say it is the markets, not the banks, that are squeezing American borrowers.
The Obama administration hopes to jump-start this crucial machinery by effectively subsidizing the profits of big private investment firms in the bond markets. The Treasury Department and the Federal Reserve plan to spend as much as $1 trillion to provide low-cost loans and guarantees to hedge funds and private equity firms that buy securities backed by consumer and business loans.
The Fed is expected to start the first phase of the program, which will provide $200 billion in loans to investors, in early March.
There is a lot of outrage on the street about this as a huge giveaway to giant corporations.
My read -- well-intentioned but ill-fated.
It is important to understand what this program is not -- otherwise we risk falling prey to the Santini chorus of "They're blowing my money on poor, Black, inner-city home-owners!":
- It is NOT motivated primarily by a desire to make money for hedge funds. It is motivated by the desire to help the economy -- Joe the Borrower, businesses, corporations who can't seem to borrow at decent rates. As the article points out:
The market for new securities backed by mortgages and other types of loans has collapsed. Last year, investors bought $313.9 billion of these securities, down from $1.6 trillion in 2007 and $2.1 trillion in 2006, according to Dealogic.
- It is NOT a way for banks to charge you usurious rates.
Under the program, the Fed will lend to investors who acquire new securities backed by auto loans, credit card balances, student loans and small-business loans at rates ranging from roughly 1.5 percent to 3 percent.
- It is NOT throwing money to bad borrowers in an attempt to inflate the bubble:
For one thing, the Fed will make loans against only triple-A rated securities, not lower-rated bonds, which are first to suffer losses when borrowers default on loans.
But the road to hell is paved by good-intentions. This is a desperation move by the administration to solve a very tough problem.
Let me give an example:
My neighbor Joe the Hardworker has an excellent credit credit.
He bought a car in 2008 and borrowed $20K from Citi to finance it at 8% interest. Well, his loan now bundled into a pool with thousands of others, is thought to be worth only $10K on the market.
This year, he's looking for a loan to buy yet another car for his daughter who's starting college.
Guess what?
Citi won't loan to him because they have too little capital, and already have millions of loans like his on the books that are worth only half as much. They'll need at least 16% (or double)interest in order to take on a loan that's immediately going to be worth half as much on their books. And if they do offer that interest rate, then they'll have to read rants on DailyKos telling calling them usurious meanies for not loaning Tarp money generously.
So, along comes Mr. Geithner with his checkbook feeling real sorry that Joe can't buy a car. He's willing to incent a hedge fund to loan to Joe.
In fact, he may have to write a check for $10K to the hedge fund ... why? Because anything less and the hedge fund would rather buy up Joe's old loan from Citi.
I told Joe about this and he felt really bad that taxpayers were subsidizing his car purchase.
He said, "Why doesn't Geithner send me a check for $5K and my daughter can take the subway?"
Ok, so that was simplistic. If Joe had been a small businessman who needed to borrow $20K to grow the business then you can see why Mr. Geithner is anxious that the spigot of capital not be closed, even going to the extent of putting up half of it.
Why doesn't the US lend directly to Joe? Because it lacks the skills required to tell deserving credit-worthy borrowers from deadbeats -- Joe the real plumber from Joe "The Phony" Wurzelbacher. That function is done by bank officers.
Giving money to banks -- not clear that will work. About a thousand banks are predicted to close over the next 5 years. It is not easy to tell the good ones from the bad ones -- and many of them cannot take on more assets (i.e., your loans -- good or bad) because of inadequate capital.
In a nutshell, there are too many loans already and not enough money.
The alimentary canal of the system is engorged with candy-bars and fruit and french-fries ... it's going to take some time before anyone can eat anymore, and yes, we have to go to the shitter first.
There are no simple answers -- whether it is more TARP, more TALP or Nationalize! or Trader Tea Parties.
To take your mind off how fucked we are, you can watch Austin do his thing ... it's funnier now that ONE HUNDRED BILLION DOLLARS is petty change ...