Gawrsh ... I'm sure I got the hang of it this time

(Initial reviews were a lot more strident than reality, or so it would appear, based on a summation of the Warren Report coming out from Reuters. Golly what a groundbreaking expose', if the Federales are right then they are right and if the Federales are wrong something else will be required. Hope there is more to it then this article suggests. -AM)

Last updated 10:30 08/04/2009
Reuters via stuff.co.nz

The US government's huge financial rescue programme may get the nation through the present economic crisis, but it likely won't be enough if the downturn is worse than expected, a congressional panel said.

Six months after the Bush administration created and launched the US$700 billion Troubled Asset Relief Programme, the TARP's Congressional Oversight Panel said the government is essentially subsidizing the financial system as "a short-term bridge from earlier prosperity to future prosperity."

In a 151-page report, the panel, chaired by Harvard Law School Professor Elizabeth Warren, said, "If its assumptions are correct, Treasury's current approach may prove a reasonable response to the current crisis...

"But if the economic crisis is deeper than anticipated, it is possible that Treasury will need to take very different actions in order to restore financial stability."

The congressional panel said the TARP has so far spent or committed US$590.4 billion of its US$700 billion in funding.

But the total value of the rescue programme now exceeds US$4 trillion, it said, taking into account related Federal Reserve and Federal Deposit Insurance Corp commitments.

"Six months into the existence of TARP, evidence of success or failure is mixed," said the panel's report, which cited basic assumptions underlying the government's approach to the worst financial crisis in generations and a deep recession.

One assumption, it said, is that the massive deleveraging under way in the financial system, with steep declines in wealth nationwide, results largely from temporary liquidity constraints caused by toxic assets paralyzing credit markets.

Crucial to this assumption is the question of whether toxic asset prices today reflect fundamental values, or whether they are artificially depressed by frozen markets, or both.

If the prices of toxic assets are chiefly being held down by a short-term "liquidity discount," the report said, then: "This means, in effect, that the banking problem is temporary.

"Once market confidence is restored and economic growth rebounds, the problems facing the financial institutions will be largely resolved. In effect, subsidisation is a short-term bridge from earlier prosperity to future prosperity."

The idea of a liquidity discount that can someday be relieved, letting toxic assets gain value, is the basis of arguments made by officials that the financial rescue programme could someday produce future gains for taxpayers.

But if the rock-bottom prices of toxic assets today reflect a fundamental, lasting shift in values, the picture changes.

"It is possible that Treasury's approach fails to acknowledge the depth of the current downturn and the degree to which the low valuation of troubled assets accurately reflects their worth," the panel's report said.

If that is the case, different approaches will be needed, said the report, reviewing past financial crisis responses.

Among precedents reviewed were the Great Depression of the 1930s; the 1984 US government seizure of Continental Illinois Bank; the US savings and loan crisis of the late 1980s; the 1991 FDIC bank insurance fund recapitalisation; Japan's so-called "Lost Decade" of the 1990s; and strategies currently being used in Iceland, Britain, Ireland, Sweden and elsewhere.

"To deal with a troubled financial system, three fundamentally different policy alternatives are possible: liquidation, receivership, or subsidisation," the report said.

In one section, it called liquidation "the option least likely to sap the patience of taxpayers... By contrast, taxpayers become particularly impatient when subsidies are used to help banks acquire other banks, stave off losses by bank shareholders, or serve existing management."