Tarp Program - Did It Work and if Yes, Was It a Stimulus Bill - Report Example

TARP PROGRAM – DID IT WORK AND IF YES, WAS IT A STIMULUS BILL? The Congressional Oversight Panel’s December Report1 takes stock of the Troubled Assets Relief Program Almost all of the experts consulted by the Panel agree that the ‘TARP played an important role along with other emergency programs from the Federal Reserve and the FDIC, in stabilizing the financial system’ The TARP Program became the government’s fiscal response to the crisis created as a result of the crash of Lehman Brothers and the government bailout of AIG. The initial TARP programs which were aimed at shoring up the capital base of financial institutions had a positive impact on the market From a macro-economic perspective, the federal government’s massive deficit spending played an important role in fostering economic recovery. TARP’s investments in General Motors and Chrysler have helped the Auto makers move unusually fast through the bankruptcy programs and prevented a sharper downturn in manufacturing sector and the economy. From the perspective of public investors, Treasury got back more than one quarter of the money it spent on capital injections and has earned an annual rate of 17% on the money invested with the institutions that have now repaid the TARP investments. The Congressional Oversight panel gave a ‘mixed report card’ to the Troubled Asset Relief Program. In essence, the Congressional panel states: ‘the bailout stabilized the financial markets but is failing to spur lending, stem foreclosing and prevent small bank failures;2 According to the Panel, the bailout program did more harm than good by allowing some of the banks and financial institutions which were deemed too big by the regulators to allow them to fail, to become even bigger by creating an unrealistic expectation that big banks will always be saved. Harvard University Professor Elizabeth Warren who is the chairperson of the panel states that “Congress specifically states in the legislation that it expects the benefits will be to get ahead of the foreclosure crisis and to deal with the larger economic crisis. That hasnt happened." The Executive Summary3 of the December Oversight Report concluded that, after 14 months of inception of the TARP program, the following short comings The availability of credit, the lifeblood of the economy, remains low – Banks have been reluctant to lend and many small-business and consumers are reluctant to borrow. Bank failures continue at an unprecedented rate – 149 bank failures reported between January 1 2008 and November 30 2009 and the FDIC has to step in to repay depositors at a growing number of failed banks. The problem is likely to worsen as deep seated problems in commercial real estate sector are poised to inflict further damage on small and medium sized banks. Toxic assets remain on the balance sheet of many large banks – Some of the major financial institutions continue to hold toxic mortgage-related securities that contributed to the crisis, waiting for a rebound in assets that may take a long time to occur. Foreclosure crisis continues to grow – More than 2 million families have lost their homes to .foreclosures since the start of the crisis and countless more have most their homes in short-sales or have turned in their keys to the lenders. Job losses continue to escalate. – Unemployment levels have been at their highest since June 1983 in spite of the Government taking unprecedented measures to bolster up the economy. Markets remain dependent on government support – Market Stability since the economic crisis has been in part, the result of the extraordinary mix of government actions, none of which are likely to remain indefinitely. Government intervention signaled and implicit government guarantee of major financial institutions, and unwinding this guarantee poses a difficult long-term challenge. The TARP Program is not a stimulus bill4 as its primary objective was to stabilize the financial institutions and act as a measure to jump-start the economy whereas the Housing and Economic Recovery Act of 2008(The stimulus Package) was designed to create new jobs. EFFECTIVENESS OF THE LATER STIMULUS BILL AND CASH FOR CLUNKERS PROGRAM IN CREATING JOBS Effectiveness of Stimulus Bill The American Recovery and Reinvestment Act of 2009 passed by the Congress on February 13th 2009 and signed into a Bill four days later by President Obama lists ‘Create new jobs and save existing ones’ as one of its three immediate goals.5 Out of the $787 billion recovery package, $288 billion was allocated to tax benefits - $92.8 Billion have been paid out, $275 billion allocated to Contract, Grants and loans and $81.6 billion paid out and $224 billion allocated to entitlements and S113.3 Billion paid out as on February 26th 2010.6 The number of recovery funded jobs reported by recipients from October 1 to December 31st 2009 stand at 594, 754.7 These numbers may be tough to verify and may be inflated as a result of errors in data collection. For example, an ABC New report8 cites that 30 jobs were created in Arizona’s 15th Congressional District with just $761, 420 in federal stimulus spending according to Recovery.gov, the US Government’s website tracking the stimulus spending. The problem is Arizona has 8 Congressional districts only and there is no 15th congressional district. For Connecticut, 25 jobs were created for $0 in the 42nd district and there is no 42nd district in Connecticut. There have been mixed reactions to whether the Stimulus Bill has been really effective, or not since its inception in February 2009 and it would be prudent to wait for the third quarter of 2010 to really measure the effectiveness of the Bill in Job Creation. Effectiveness of Cash for Clunkers (CARS) Program As per Council of Economic Affairs (CEA) estimate, about $92000 of government spending creates one job-year.9 The National Highway Traffic Safety Administration (NHTSA) paid $2, 853, 416, 000 in claims10 and going by the above estimate, about 31015 job-years were created. Annualized over the third and fourth quarters of 2009, this resulted in approximately 62030 jobs created or saved during the second half of 2009. As per CEA estimates, ‘64% of these jobs represent direct and indirect employment effects including jobs directly related to the production, assembly, distribution, and sale of vehicles, and 36% represent induced effects which result in income resulting from direct government spending that simulate further job creation.’11. Based on the above facts, it is safe to assume that the CARS programs resulted in accelerated restoration of jobs during the recession. Another Stimulus Needed? Yes Or No There isn’t a universal consensus on the need for another stimulus. The answers range from straight ‘Yes’ and ‘No’ to ‘It is too early to tell’. A CNN article titled ‘Ask the Economists – Another Stimulus’12 asked a group of economic thinkers about the need for a 2nd stimulus: Martin N Baily: Fellow at Brookings Institution and Chairman Of Economic Affairs Committee under Bill Clinton: ‘Not needed because budget deficit provisions are horrendous and it may be difficult to finance those deficits’ Joseph Stigilitz: Professor at Columbia University and Nobel Prize Winning Economist – ‘Yes because the net stimulus is much smaller than the advertized stimulus because of the offsetting state and local effects’ Chris Varvares: – President, Macroeconomic advisers in St. Louis – ‘No, as the economy will show a positive growth in the second half of 2009 and sustain this growth over the next couple of years’ Arnold Kling: – Adjunct scholar at Cato Institute and former economist for the Reserve Board – ‘No because of a faulty design of the stimulus by the congressional leadership which focused on what would be an advantage to itself politically rather that what would get the economy going’. Lawrence Mishel – President, Economic Policy Institute – ‘Yes because we are approaching 10% unemployment and need to do things to help families get through the crisis. There should not be a permanent increase in deficits, just higher for a year or two’. Mark Zandy – Chief economist for Moody’s Economy.com – ‘Too early to tell – there is concern among global investors that we are running very large deficits. If they revolt, interest rates rise and you negate any benefit from another stimulus’. Concluded WORKS CITED 1. December 2009 – Congressional Oversight Panel – December Oversight Report: WEB 2. CNNMoney.com report on performance of TARP: WEB- http://money.cnn.com/2009/12/09/news/economy/watchdog_tarp/index.htm 3. http://bingaman.senate.gov/policy/20090202-02.cfm - Web Page of Jeff Bingaman – US Senator from New Mexico: TARP is not a stimulus bill - 4. THE American Recovery and Reinvestment Act of 2009 : WEB - http://www.recovery.gov/About/Pages/The_Act.aspx 5. Overview of Funding: Web - http://www.recovery.gov/Pages/home.aspxRecovery.gov 6. ABC News: WEB – Elusive Jobs Created Or Saved - http://abcnews.go.com/Politics/jobs-saved-created-congressional-districts-exist/story?id=9097853 7. CARS Report To Congress: WEB 8. CNNMoney.com Ask the Economists – Another Stimulus Needed? : WEB http://money.cnn.com/galleries/2009/fortune/0907/gallery.economy_stimulus_viewpoints.fortune/index.html Read More