Inspector General Says Insufficient Oversight for TARP

Neil Barofsky, the special inspector general for the TARP, is saying that oversight by the US Treasury Department and the Federal Reserve is woefully inadequate, and he also places the price tag for the bank bailouts at as much as $23.7 trillion.

By way of perspective, the whole US economy (GDP) is about $15 trillion, and the the world GDP is is listed at $65.82 Trillion.

To quote the Bloodhound Gang:

The roof the roof the roof is on fire
The roof the roof the roof is on fire
The roof the roof the roof is on fire
We don't need no water let the motherf#$%er burn
Burn motherf#$%er burn

We need to amputate the current banking system, and replace it with something that works.

Looks Like My "Amputate" Meme is Spreading

One of the better Congressional freshmen is Alan Grayson (D-FL), and he is now using the term amputate with regard to AIG:

Grayson joined fellow Democrats as well as Republicans in blasting AIG for its refusal to give up hundreds of millions of dollars in bonus payments. He painted the government's choice as a stark one, using the metaphor of treating a wound versus amputating a limb.

"It's not clear to me at all that we're taking the correct approach by allowing AIG to continue to operate, regardless of who owns it," Grayson told me. "At this point, ownership is becoming an amorphous concern when comes to a company that borrows millions and millions without any prospect of paying it back. ... Do we continue to allow the bleeding or not?"

Note that I am not suggesting that the distinguished gentleman from Florida reads my blog, merely that my suggestion of amputating diseased banks is something that other people are coming to independently.

The banking system has more than zombie banks. It has gangrenous limbs that will continue to poison the rest of the body until removed.

Submitted to Marketplace

They allows people to submit short (>400 word) commentaries for broadcast, so I sent them the following missive.

It's highly unlikely that they would publish it, I have no professional background in the field, and I'm just not that good a writer, but what the hell.

Amputating the Financial Industry

It is clear that the economy is sick, and it is also clear that the two things that are most directly responsible for this are the finance industry, and real estate.

For real estate and construction, we have a classic bubble, where prices outstripped values, and the only real solution is for time and no small amount of inflation to put borrowers back above water.

The finance industry is a different matter. Between the Treasury Department and the Federal reserve, trillions have been spent to recapitalize this industry without a real thaw in credit.

If the economy is a body, it is clear that there is a serious illness in the financial industry, and the question is whether this is simply a bad infection, illiquidity, or whether this is gangrene, insolvency.

I would argue for the latter, and with advanced gangrene the only option is to amputate.

So, how can you amputate, when the finance industry is essential to the functioning of the rest of the economy?

The answer is that it’s not essential. Reasonable access to credit that is essential.

The question is not how to preserve Wall Street, it is how to make sure that businesses on Main Street can continue to operate.

The numbers to do this are actually relatively small, GM and Chrysler got $18 billion to continue to operate, which is a drop in the bucket compared to the more than 8½^* trillion that has been allocated to the finance industry.

Even just using the $350 billion remaining in the TARP to set up a lending facility for small and medium businesses would go a long way.

In fact, it would go much farther than throwing more money at the Wall Street.

You could recruit a workforce quickly from the hundreds of thousands of rank and file financial professionals who have been laid off in 2008.^†

This would have the effect of providing the grease to ease the wheels of the economy, without enormous expense of supporting what are walking dead zombie institutions.

Obviously, you would not want this as a permanent solution, but our economy is more like an octopus than a person, and so lost limbs regenerate over time, so if one were to add a small surcharge, which would render this facility irrelevant and unnecessary once a new finance industry, springs from real market needs.


Footnotes:
^* Economic rescue could cost $8.5 trillion
^† Layoffs in U.S. up 59% from 2007

Thoughts?

Economics Update

Well, Calculated Risk has your daily inventory of interest ratescredit crisis indicators, and today, they are pretty neutral.

In Hank Paulson and His Evil Minions^™ news, he has finally publicly eschewed the idea of buying distressed assets.

I think that the reason for this is that the sales price would either be so low that all of his Wall Street friends would be technically insolvent, or so high as to land his corrupt ass in jail, because the big sh$#pile is near worthless. That's why there is no market. Wall street cannot handle the truth.

It also looks like he will start requiring some level of private capital to match any bailout money. My translation is that now that he's bailed out his Wall Street friends, anyone else who wants money needs to work for it.

Of course none of this will do much for the economy, with estimates that holiday sales will drop 1%, the first decrease since 1985, and home values falling for the 7th straight quarter.

What we should be thinking about is not how to rescue Wall Street, but rather how to amputate it from out economy, because these parasites are on a path to destroy more than 10% of US GDP.

Speaking of parasites, it looks like GE capital just got the FDIC to insure $139 billion of their debt. It appears that, "GE’s finance businesses are able to seek FDIC debt coverage because its GE Capital subsidiary also owns a federal savings bank and an industrial loan company, both of which already qualify."

Like I said, parasites.

In the mean time, recession worries drove oil down again today, to a 21 month low, and it appears that the world thinks that the UK is in worse shape than the US, because not only was the dollar up today, it hit a 6-year high vs. the pound.

If you are worried about a resurgent Russia though, you have less to worry about, with Russia easing up support on the Ruble, which promptly fell.