Why couldn’t the Fed simply have increased its balance sheet by another $700B?

I may not be a finance guy, but i have pretty good business instincts and read quite a lot of economic issues. I am not persuaded by the analysis that I read.regarding TARP and the financial crisis.

For example, I have yet to hear someone explain why in light of actions by the Fed and the FDIC, why the TARP was necessary.

Why couldn’t the Fed simply have increased its balance sheet by another $700B?

Until someone explains why not, its hard to take the TARP stuff seriously. I mean, Paulson changed his mind on the specific actions to be performed under TARP almost immediately after passage. Given the seat-of-the-pants aspect of this crisis, the definitiveness of “we needed TARP” is not persuasive to me.

So why couldn’t the Fed simply have increased its balance sheet by another $700B?

I mean, if you are going to go up to $2.2 T why not go to $2.9T?

The TARP and the Fed’s liquidity programs are intended to stem the effects of panic and systemic crisis. They’re supposed to get the system back to something like normal without a meltdown.

If we get back to near normal, and banks then find themselves unable to attract capital, the global economy will either get smaller, invent some new ways to intermediate credit, spend a lot of years promoting some new banks, or all of the above.

(1) Fed Actions – 0%prime rate, increased balance sheet
(2) FDIC – raise guarantee to $250k
(3) TARP

How much worse would we be if there was no TARP?

I think your order is wrong. Fed action was and is more important than the TARP.

Was the TARP truly necessary given the other actions?

I would rather have the Fed push the limits of government intervention than Congress and the Treasury department.

I’m not convinced you have a clear grip on the structure of the Treasury debt market at the issuing end. I don’t know enough about small banks and other intermediaries like credit unions to understand where you’re going with this.

It’s not enough for large banks not to fail. We have to get through a long period of time, at least a few quarters, in which there are no major failures at all. The last thing you can do is lend money overnight to someone that might not be there in the morning. That happened so many times over the past year that there’s no confidence out there.

Overnight repo rates for Treasury specials were negative almost every night, and the rate of fails was so high that the Treasury even added penalties on them for the first time that I can remember.

The Fed funds rate was tracking between 0.20 and 0.35 almost every night, even though the Fed’s target at that time was 1 percent.

The swap spread on 30-year Treasury bonds was negative almost every day. One day it hit -60 basis points.

All of this stuff was just totally insane, bat-excrement crazy. The financial markets were fully expecting the world to end. The stock markets, by behaving with relative calm (only falling 23% in one week), showed yet again how good they are at denying reality.

All of that panic has subsided and calmed down since then. The TARP and the wide range of extraordinary Fed actions get the credit. They applied the defibrillator paddles over and over again, and the heart finally started beating again.

Now, a small amount of risk-tolerance is finally starting to creep back into the system. We’ve got a basis for further improvements. There’s a very long way to go, but anyone who thinks the TARP was a dismal failure either wasn’t paying attention, or has an exceptionally high pain threshold.

At what point does this megate any possible ROI that may or may not actually occur?

BTW, the article above concludes that any transfer of wealth from the TARP program has thus far gone to the Bondholders/Depositors/Creditors claimants above the govt, not to the common stockholders below.

(Now, ensuring that the funds don’t get weaseled away on excess pay, dividends, etc. is another issue.)

In fact the analysis of the article below (it’s a model analysis, not the absolute truth) concludes that the original toxic asset purchase would have been less efficient in taxpayer dollars than the path chosen by Paulson.

From the WSJ article

The report faulted Treasury on a variety of fronts, saying it has:
1) no ability to ensure banks lend the money they’ve received from the government;
The alternative is for the govt to get directly involved in the lending business. We saw how that worked w/ CRA. And of course, the banks aren’t lending with the basically risk free alternatives that this environment provides
2) no standards for measuring the success of the program;
No, but Paulson didn’t exactly have the luxury of time as the financial system teetered on collapse. See Link courtesy of Francis for a working paper that attempts to develop a framework.
3) and that it ignored or offered incomplete answers to panel questions.
Guilty. But good answers would involve explaining and debating concepts such as those in the aforementioned link. No easy task in our sound byte media.

I accept not one iota of responsibility. It was the Democrats. All the way, 100%.

McCain clearly failed to explain the issue. I probably wouldn’t be here posting if not for the mis-attribution of blame that’s got us headed in the socialist direction. This pisses me off to no end. And now Obama is going to use the $700 billion quoted figure to push through, not the facilitation of private activity, but the purchase of billions/trillion of actual garage sale like stuff. All sales final.

Seems to me the Fed and FDIC are doing things that are helpful. Not sure what legal basis they have for those actions, but given the Fed and FDIC actions, I think the TARP was not necessary.

TARP is opening the barn door for a whole lot of pork and Keynesian nonesense that will take decades to recover from

State and regional banks are getting virtually none of the TARP money, at least in Michigan.

Those same banks are the ones doing all of the lending . . as well as credit unions.

Let the Chinese by T-Bills from the smaller banks–thats the kind of fiscal stimulus we could use.