Comments from the real world

Here’s some insightful comments from Thomas Haynes, a friend of CEI’s:

There’s a very interesting debate that could be conducted on who’s the madam, who’s the john and who’s the pimp in the relationships between the executive branch, the legislative branch and the financial services industry, but only so much of that debate can take place on Internet.

I did, however, want to note to those involved in the debate over TARP that my experience as a borrrower, plus some candid comments from bankers, make it crystal clear that these public funds are not being deployed for the stated public purpose of making credit more available and more affordable and thus stimulating (or resuscitating) economic activity.  The credit markets that we tapped were both flowing and reasonably priced shortly before the bailout bill. They continue to flow now, but they are no longer priced as reasonably.  Credit spreads over benchmarks (LIBOR being the most relevant) have widened by 150 basis points since late September.  Every banker I’ve spoken too  confirms this, citing supply demand and cost of money factors.  When you question the cost of money component, however, they begin to stammer once your make the point that either LIBOR or the fed funds rate, or some combination of the two, should be very precise indicators of the cost of funds for big banks.

When so confronted, two answers seem to come up:  (1) you’re right, there’s no cost of funds issue and the enhanced spread over LIBOR is simply rent-taking in a less competitive environment or (2) actually one part of our cost of money has skyrocketed and that’s the 5% we’re paying on the TARP money (which, some add, we didn’t want).

So the money flowing to B, B & T and others is not making its way into the supply of credit (privately, banks concede that and B,B & T’s comment about “other uses” is very revealing) and if it did, it would drive rates up because it’s more expensive money than the money currently lent to A-rated borrowers.  Where the money is going is to shore up balance sheets.  That’s not a bad thing (less leveraged financial institutions may be a plus in the long term), but it’s not going to have any impact on short term economic activity.

As everyone has noted, the TARP money is not going to buy TA’s (troubled assets).  It’s not going into credit markets. The only remaining arguable public purpose is that it’s mitigating the reality or the fear of further failures by financial institutions.

Is that where we are as a society, however, that the use of public funds to prop up confidence in big, important private businesses is viewed as legitimate?  How different is that from Russia’s bailouts of its oligarchs or the Chinese party-managed economy?