Holes In TARP Hurting Market Confidence
Senior Features Editor
"Slush fund" ... "banana republic" ... "Keystone Kops."
That's how some observers are describing the government's effort to stabilize the financial system, including its centerpiece rescue mechanism, known as the TARP.
Hatched hastily about two months ago, the TARP (Troubled Asset Relief Program) was
conceived to stabilize financial markets and restore investor confidence. But now it is looking so amorphous and vulnerable to political trade winds, that it is has become almost a constant of uncertainty.
"Things are changing so quickly, to a certain extent, it undermines the effectiveness of the actions undertaken" " Michelle Girard, senior economist at RBS Capital Markets, told CNBC Tuesday. "It makes people feel they don’t really have a handle on things."
"It's a little like the Keystone Kops," Girard added. "They're very reactive and it's very ad hoc and I think that undermines confidence at a time when what we need most is confidence that the officials in Washington know what's going on and know how to address the problem." (See her full comments in the video)
The latest turn came from Treasury Secretary Henry Paulson, who disclosed Monday that he did not plan on seeking authorization to release the second $350 billion in funds authorized under the TARP plan. He said he wanted to "preserve the firepower, the flexibility we have now and those that come after us will have."
What Paulson calls flexible, others consider amorphous. They say it is one of the plan's failings, along with its basic structure and generally poor coordination and execution. Together, critics argue, the problems are creating unnecessary uncertainty and undercutting its impact.
Just a week ago, Paulson made what many consider a major reversal by essentially dropping the TARP's original concept—to buy troubled assets in an auction—which many considered a bad idea in the first place. Instead, he said he would focus on its companiion program—exchanging capital injections for equity stakes in financial institutions—which Congress foisted on the Treasury Secretary in agreeing to approve rescue legislation.
Watch Paulson, others testify before House Financial Services panel—9:30 a.m. ET on CNBC.com
"If you start changing your mind about what the $700 billion is for, it detracts from your credibility," says Bob Bixby, executive director of the Concord Coalition, a non-profit group advocating fiscal discipline. "Right now it's questionable as to what the strategy is."
On the very same day Paulson changed course, Rep. Barney Frank (D.-Mass.), chairman of the powerful House Financial Services committee, was extolling the virtues of the auction process.
"It gives an appearance of they're-making-it-up-as-they-go along-element to this," says Steve Adamske, a spokesman for Rep. Frank, adding that the committee wished "there were a greater emphasis on foreclosures."
"By not having a clear focus and vision, people read him [Paulson] to believe that there was billions of dollars available for other things," says Brian Bethune, chief US economist at Global Insight. "The unintended consequence was that the fund could be raided."
And that's exactly how it seemed to many when some in Congress started talking about using TARP funds to help the ailing auto industry.
"Money in Washington is fungible," says Tom Schatz, president of Citizens Against Government Waste, adding the TARP has "become a kind of a slush fund in some ways in terms of who the Congress wants to bail out. Lobbyists are lining up to figure what they can get out it."
Others say that and a sizable election victory has emboldened Democrats in Congress.
"It's hard to escape the feeling that the majority in the Congress are paying off a strong constituency that helped them enormously in the last election," says former ten-term Republican congressman Bill Frenzel, now with the Brookings Institution. "You are seeing the Congress in a role people hate to see it in—responding to powerful constituencies rather than going after solving the problem."