Yossarian, the protagonist in Joseph Heller's Catch-22, tries to avoid additional missions as a bomber pilot by asserting he is crazy. However, military rules stipulate that an insane person must not suspect they are insane. Yossarian finds great frustration in trying to defeat this dilemma.
Treasury Secretary Hank Paulson must surely understand Yossarian's frustrations. After initial criticisms of the TARP, Secretary Paulson modified the plan to directly inject equity. Treasury was afraid injections would be stigmatized like Fed discount window lending, or worse - that banks not receiving capital would be assumed insolvent. To avoid this issue, Paulson required the biggest banks to take what had been advertised as "voluntary" government capital. Now the Treasury is taking heat for allowing these same banks to pay dividends, acquire foreign banks, and hoard capital instead of loaning it out. Here, Hank really starts to channel Yossarian. If he had restricted banks ability to pay dividends or make certain acquisitions, bank CEOs - and economic conservatives generally - would have been even more livid at being forced to accept government money. Without these restrictions, he watches $7B of taxpayer money flow to China.
The way out of Hank's catch-22 is to force this capital to be deployed to loans and restrict dividends and certain (e.g., foreign) acquisitions. Half of the $700B TARP funds already out the door, and the rest is waiting for the incoming Treasury Secretary. This Secretary will find it better to loan conditional capital to willing banks than to force ineffective loans on unwilling banks.
Treasury Secretary Hank Paulson must surely understand Yossarian's frustrations. After initial criticisms of the TARP, Secretary Paulson modified the plan to directly inject equity. Treasury was afraid injections would be stigmatized like Fed discount window lending, or worse - that banks not receiving capital would be assumed insolvent. To avoid this issue, Paulson required the biggest banks to take what had been advertised as "voluntary" government capital. Now the Treasury is taking heat for allowing these same banks to pay dividends, acquire foreign banks, and hoard capital instead of loaning it out. Here, Hank really starts to channel Yossarian. If he had restricted banks ability to pay dividends or make certain acquisitions, bank CEOs - and economic conservatives generally - would have been even more livid at being forced to accept government money. Without these restrictions, he watches $7B of taxpayer money flow to China.
The way out of Hank's catch-22 is to force this capital to be deployed to loans and restrict dividends and certain (e.g., foreign) acquisitions. Half of the $700B TARP funds already out the door, and the rest is waiting for the incoming Treasury Secretary. This Secretary will find it better to loan conditional capital to willing banks than to force ineffective loans on unwilling banks.
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2 comments:
Of course, I am pleased to see Yossarian alive and well in your blog. How can Paulson force the loans to be deployed? Would a responsible bank be in "lending mode" with the economic outlook as it is? How many businesses are expanding and need capital to do so?
You could condition the interest rate on increasing loan assets by 90% of the capital provided. Failure to increase loan assets to that level would trigger a higher interest rate. As for needed capital... if nothing else, businesses need to refinance existing financing as it rolls, and there are surely some businesses that need access to capital.
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