What is TARP and how will it save our economy?
The Troubled Asset Relief Program (TARP) is a funding program established by the US government, which primarily functions to relieve the sub-prime mortgage crisis. It was revised in October of 2008, by then Treasury Secretary Henry Paulson. Through this program, the US Treasury is given the ability to purchase up to $700 billion in mortgages that were issued before March 14, 2008, and any other factors that the Finance Secretary and the Chairman of the Fed find necessary to ensure market stability. In essence, it is part of the billion dollar bailouts that our government has been issuing to banks, car companies, and other financial institutions.
These illiquid assets are clogging up our financial system, and undermining the strength of our otherwise sound financial institutions. As a result, Americans’ personal savings are threatened, and the ability of consumers and businesses to borrow and finance spending, investment, and job creation has been disrupted.- Treasury Secretary Henry Paulson
The Program aims at purchasing those assets that are either illiquid or difficult to value. (These are assets which can cannot be turned into cash quickly, or are difficult to estimate an appropriate fair market value for various reasons.) In this approach, the program will theoretically remove troubled assets from balance sheets so that the companies can continue operations without having to deal with these unremitting costs. The hope is that, by removing these troubled assets, companies will be able to recoup and stabilize their operations to a profitable level. Once a relatively stable level of operations is realized, the prices of the troubled assets will once again rise to healthy levels. Thus there is benefit for both parties. The Treasury profits off of its initial investment of troubled assets now turned profitable, and the companies have a large “debt” taken off their hands.
(These troubled assets are not really debt, but are assets that the company has no way of selling and thus are a sort of liability. An example could be Enron’s Dabhol plant. While it was market on the financials as an asset, the plant was actually causing losses. On top of that, there were no bidders who wanted to buy Dabhol because of its unprofitability.)
Another aim of the program is to raise confidence in our financial system. By removing some of the liability of the bank’s hands, there will be more liquid capital for the banks to loan. With more lending, there will be more spending, and with more spending people will be more confident in taking more loans, thus strengthening and revitalizing the system.
In the following clip, Treasury Secretary Timothy Geithner talks on our financial crisis, and the financial plan (TARP II) that is needed to help the economy recover. He discusses where our economy is right now, the key reasons for its fall, and lists the two key areas where a solution can be found. One of these solutions is the credit market. Among other things, he argues that a nations ability to issue credit is essential to growth. Right now credit markets are in shambles because there are insufficient funds to issue out, and eligible people are scared to take out loans. TARP II will insert large amounts of capital to help day-to-day operations, and build investor confidence.