The U.S. Treasury has failed to reveal its strategy for stabilizing the financial system, not answered questions asked by a government watchdog, and has done nothing to help struggling homeowners, a report being released Friday charges.
In the most scathing criticism yet of Treasury's implementation of the $700 billion financial-rescue package, a draft report being issued by the five-member congressional oversight panel said there appear to be "significant gaps" in Treasury's ability to track hundreds of billions of dollars of taxpayer money.
"The panel's initial concerns about the [Troubled Asset Relief Program] have only grown, exacerbated by the shifting explanations of its purposes and the tools used by Treasury," said the draft report, which found that the department has "not yet explained its strategy" for stabilizing the financial markets.
The report faults Treasury on a variety of fronts: having no ability to ensure banks lend the money they have received from the government; having no standards for measuring the success of the program; and for ignoring or offering incomplete answers to panel questions.
Let's look at this in a few smaller pieces:
1.)The U.S. Treasury has failed to reveal its strategy for stabilizing the financial system: True, but there's a reason for that: the Treasury's rationale has been changing. First they were going to buy troubled assets, then they injected capital into the banks. The bottom line is the second option -- injecting capital -- was a far better idea. But it was the Treasury's second choice. And don't be surprised if a third option emerges and is debated.
2.) not answered questions asked by a government watchdog: Big problem for which there is no defense. If you get taxpayer money, you answer taxpayer questions.
3.) and has done nothing to help struggling homeowners: my understanding was this was not part of the TARP's original plan. I could be wrong (and if I am please let me know), as the initial bill was passed quickly with the usual "shove this in at the last minute" mentality. That's not to say nothing should be done, because this is at the heart of the problem the US economy is facing right now.
4.) having no ability to ensure banks lend the money they have received from the government: news flash: loan issuance drops during a recession. In addition, according to the latest Quarterly Banking Profile from the FDIC banks are really struggling meaning loan issuance isn't a high priority right now.
5.) having no standards for measuring the success of the program: The US financial system is still living and breathing. That makes it a success.
Let me back up a bit. I think what the Treasury was originally trying to do was prevent a systemic meltdown -- like the one that started the Great Depression. Their primary objective was to prevent a wave of failures and collapses that would paralyze the economy and send really painful ripples around the globe. And in that, so far, we've succeeded. I think an emergency room analogy is appropriate. The person came in after a car wreck caused by a DUI. This is not the appropriate time to lecture them on the dangers of what they did. Instead it is the time to stabilize the body and get it into surgery.
And to hope that this would somehow lead to an increase in loans in the middle of a recession where banks are in the process of writing down asset values is a misplaced fantasy. That wasn't going to happen with the money.
The lack of communication with Congress about what is happening is wrong. There is no defense for it.
So -- what should happen with the money? All of the government money received should be placed in a separate account at the bank. It should first be used to stabilize that bank, for example, if the bank has to increase its loan loss reserves or has to write down the value of assets. The bank should be able to use the money to buy a distressed institution so long as the merger will not cause the buying institution to become distressed. In addition, the bank should suspend all dividend payments and bonuses for all employees. This is an emergency -- and in an emergency everybody tightens their belt.