Michigan Bank Eats Tarp, Tries Not to Die

There seems to be some surprise that the money from the U.S. government's TARP (Troubled Asset Relief Program) fund has not been used by banks to lend to customers.  The New York Times has a story about a Michigan bank that remains reluctant to lend out the $72 million dollars it received.

But Independent, hard put to find good borrowers in a suffering economy, and fearful of making the kind of mistakes that got it into trouble in the first place, is not doing much lending these days. So far it is using all of the government’s money to shore up its own weak finances by repaying short-term loans from the Federal Reserve. “It is like if you are in an airplane and the oxygen mask comes down,” said Stefanie Kimball, the bank’s chief lending officer. “First thing you do is put your own mask on, stabilize yourself.”

(N.Y.T.)

That banks would seek to save their own balance sheets should have been obvious from the very beginning. Further, had the Feds actually stuck to removing "troubled assets" from the banks, then things might be further along. The whole focus on trying to get banks to lend, or get people to seek loans for housing or other items, is absurd. The necessary result from our gross inflation of everything is to let values fall, let people and businesses retrench, and let a fundamental return to sound financial practice take place.

The economy, in essence, needs to reset at a lower level. Having stabilized the largest banks, and preferably by buying out their junk assets, you then leave the bulk of the nation to return to what their wallets can truly afford.

But no. People are trying to keep the balloon lofted in the air, imaginging that banks should, can, or will continue lending in an environment where lending got them into trouble in the first place.

Put another way, and foolishly:

In Congress, anger over the management of the TARP program runs deep. Many lawmakers say that there is little oversight, and that they can see no evidence that the taxpayer money is making its way from the coffers of banks to businesses and consumers.

TARP money should do nothing more than keep our financial system from collapsing. It should not seek to prop up business, or reverse the fortunes of consumers who made any number of deliberate irrational choices. The quicker those in power realize this, the better off we will be.

Even now we have Bank of America going back to the government for help to complete its purchase of Merrill Lynch in a deal that was rather dubious to begin with. Presumably Bank of America should be out there too, vigorously lending huge amounts of money?

Another element of the deal could involve a loss-sharing agreement, typically reserved for deeply troubled institutions, under which the government would guarantee billions of dollars of risky assets, said the people briefed on the talks. That provision would be similar to the one Citigroup struck with regulators in late November, when its stock collapsed.
It was not that long ago that Bank of America was viewed as a pillar in the banking sector. But in recent months, its stock has plummeted as investors worried it has acquired companies with their own set of financial baggage.

(N.Y.T.)

The fact that Republicans are dithering over the confirmation of Tim Geithner as Treasury secretary only confirms the lack of clear thinking in the process.