I saw the Bailout fail

(I sent this to the Gainesville Sun, but I'm not sure they'll publish it. If so, I'll link.)

TARP worked but concerns remain

The Troubled Assets Relief Program of 2008 (TARP) was supposed to rescue and then stabilize the US economy after the financial services "meltdown" following the housing market crash that started in 2007. In the year since the bill became law, many have forgotten how the former president and the former Secretary of Treasury horrified us with predictions of the systemic financial collapse that would result if hundreds of billions of dollars weren't taken from the taxpayers to fix the mess that the huge banks and Wallstreet had created.

So far, it appears that a "financial Armageddon" has been avoided. I feel relieved. Since the credit markets aren't frozen up and are moving again, we should all be able to sleep better at night.

Even though we avoided the immediate catastrophe, some troubling issues remain unresolved. Of course, there's the issue over whether leaders in Washington have actually put in place reforms to make sure that megabanks can't create the same conditions that almost caused a total economic collapse. And there's the issue of whether a moral hazard was created during the course of the bailout. Will megabanks learn the wrong lesson from their almost complete destruction of our economy? Will they come to believe that they can become "too big to fail" and engage in risky, yet extremely profitable lending without regard for the consequences because they'll be bailed out again next time?

Where did the bailout money go?

As important as these two are, an even more pressing question remains. Someone should ask, "Where did all the bailout money go?" And political leaders and financial elites should be required to answer.

So where did all the bailout money go? Before last week, I, like many others, assumed that the money went into the hand of experts to shore up some important part of the financial system in dire need of repair. I had a the vague idea that the money was supposed to go to banks so that they could keep credit flowing, or so I'd heard back in the panicked days of October 2008.

Requesting for a "bailout" for my neighborhood

Last week, I began to reconsider TARP and how it was supposed to help out. Like many Gainesvillians, I live in condominium complex. It's not a new complex. In fact, it's relatively modest, but it is a place that owners and board have recently been trying to make better. The board wanted to replace old wood siding with composite that would better resist the Florida heat and moisture, paint the buildings and replace old roofs and do some landscaping ahead of the 2010 hurricane season. A majority of owners in the complex agreed that these upgrades seemed like a good idea.

So almost a year ago, our board of directors began the process of applying for a loan so that this work could be done relatively quickly instead of being done piecemeal and paid for by increased association dues or by special assessments. There are twenty buildings in the complex with over 100 owners; the loan sought was for $370,000 over a period of ten years. Every bank the board approached – five altogether – turned us down. No one wants to lend the one hundred condominium owners this relatively small sum (less than the price of Haile Plantation "dream home", correct?) to make our neighborhood better and more attractive.

The board and the property manager did their due diligence. The amount of the loan and the terms were reasonable. I believe it could have been paid back without incident. I had thought that a loan like this was exactly the sort of the thing at which the TARP money was to be aimed.

So much for bailout money trickling down to us.

Concerns over banks hoarding money

One thing that some economic commentators worry over is whether the $700 billion of TARP will actually make it into the hands of those individuals and communities who can use it. These commentators are concerned that, instead of lending and "getting credit moving again", banks may simply hoard the money given to them as a security against future defaults and tough financial times. I'm sure that banks have financially rational reasons for things they do, and unfortunately, hoarding may be the smartest thing for them to do given our current situation.

Perhaps this sort of hoarding is one reason that my complex couldn't get the relatively modest sum we wanted for our improvements.

Of course, there's a general lesson to be learned from the bailout of '08 and its consequences.

By passing TARP, we have avoided complete financial catastrophe, but in doing so, we have essentially rewarded banks for risky behavior that brought dire consequences. No meaningful regulations have been put in place to prevent the conditions that made the near-meltdown possible. And some of the richest among us, those who earn exorbitant bonuses at bank holding companies and financial services companies like Goldman Sachs and Bank of America continue, despite the fact that their shortsightedness and greed helped cause this crisis, to receive outlandish compensation even as their organizations have accepted bailout money.

Financial elites benefit when the system must be rescued

We face a serious problem that few people can or will talk about. Financial elites, with the help of government leaders, have created an unstable economic system in which, as we've seen, catastrophe is possible. Moreover, the system is such that if a "rescue" is required as it was last year, those at the top benefit handsomely from the measures taken to save the economy.

While US taxpayers are sending money to Washington to make sure that the house of cards built by the elites doesn't come crashing down, those very elites pocket a disproportionate share of the money used in the rescue. All to often, as I believe I just witnessed when my condominium complex didn't qualify for a loan, little of the money that was necessary for the rescue is invested in local communities.

We must demand accountability and a departure from business as usual from our political leaders. They have made it the case that financial elites are rewarded for their greedy gaming of the system and that people who desperately need money to improve their lives have less access to credit.