Wednesday 3rd of March 2021

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TARP Watchdog Fears Dependence on Bailouts

Politicians might say the rescue packages provided by Troubled Asset Relief Program (TARP) prevented the collapse of the U.S. economy. Instead, the program might have given birth to the sentiment of “heads I win, tails the government bails me out.”

That’s the concern of Neil Barofsky, special inspector general for TARP, in his quarterly report to Congress. His role is that of a watchdog who keeps tabs on the bank rescues. There are still issues with the financial system that may prove too much for TARP’s temporary fixes.

“The substantial costs of TARP – in money, moral hazard effects on the market and government credibility – will have been for naught if we do nothing to correct the fundamental problems in our financial system and end up in a similar or even greater crisis in two, five or even 10 years time,” Barofsky said in his report.

TARP was launched by former Treasury Secretary Hank Paulson in late 2008 as a way to put the banking system on a more solid fitting after Lehman Brothers imploded. After President Obama took office, his administration increased the program to rescue failing banks, provide additional credit for small businesses and keep more people from facing foreclosures on their homes.

Some of the largest financial firms were able to pay the government back. Still, the system remains precarious. Big bonuses have returned to Wall Street and there is a feeling the government will always come to the rescue, Barofsky said.

“Even if TARP saved our financial system from driving off a cliff back in 2008, absent meaningful reform, we are still driving on the same mountain road, but this time in a faster car,” he said.

The potential exists the U.S. housing market will face another bubble, which was at the heart of the subprime lending that brought financial markets across the globe to their knees, Barofsky said. Now the government is underwriting most new loans, including its intervention in Fannie Mae and Freddie Mac, along with other methods of assistance for homebuyers.

“The government has done more than simply support the mortgage market; in many ways it has become the mortgage market, with the taxpayer shouldering the risk that had once been borne by the private sector, he said.

Obama already has responded to some of Barofsky’s concerns, such as calling for limits on banks’ sizes and the amount of risk they will take on. However, a partisan Congress has not revealed any legislation to help the situation.