Issues & Concerns for the Everyday American
In this article we will be discussing the Troubled Asset Relief Program (TARP), the program established by the Treasury Department last year to bail out banks and which now has similar bailout programs for automakers, hedge funds, and other groups. Essentially, the program allocated about $700 billion to allow the government to buy mortgages and other “troubled assets” from failing financial institutions in order that they not go bankrupt.
So what are “troubled assets”? According to the Congressional Budget Office’s January 2009 report, troubled assets include: “A) residential or commercial mortgages and any securities, obligations, or other instruments that are based on or related to such mortgages, that in each case was originated or issued on or before March 14, 2008, the purchase of which the Secretary determines promotes financial market stability; and (B) any other financial instrument that the Secretary, after consultation with the Chairman of the Board of Governors of the Federal Reserve System, determines the purchase of which is necessary to promote financial market stability, but only upon transmittal of such determination, in writing, to the appropriate committees of Congress." In other words, the program allows the government to buy non-liquid assets, make them more liquid, and allows institutions to stabilize balance sheets.
Now that it is fairly clear what is deemed as a troubled asset, what does this program actually mean for consumers? Well, by assisting banks and other lending institutions, the government is also trying to encourage them to resume normal lending levels to consumers and businesses– which will allow Americans to build credit again! This means the bailout plan not only affects our tax dollars, but also affects our personal purchases through credit cards and other lines of credit – be it car payments, mortgage payments, or college tuition. The American Consumer should be very cautious as to the amount of credit they take on. The economy is still in repair and this process will take several years to truly see the improvements. Also note that capital economies are a constantly evolving and changing as the business cycles change and consumer demands for goods and services change.
Businesses should also see increases in productivity as they should be able to gain credit to offset start-up, operation, and expansion costs, which means more jobs! The government also relies on these same lines of credit to improve civic costs from future tax dollars or issuances of bonds. Essentially, the purpose of the bailout plan was to reestablish these credit lines for everyone – businesses, consumers, and the government – to keep our economy alive. Quite frankly, we cannot survive without credit in our global economy. When there is a credit crunch, spending decreases for everyone, which means lower salaries, more unemployment, and a weaker dollar.
So, who’s in charge of all this? The Treasury’s newly formed Office of Financial Stability, which was inaugurated last October, oversees TARP operations. The Office generates semiannual reports on the costs of the Treasury’s purchases through these investments – keeping an eye on its progress and validity.
But, how’s the program doing so far – is it really working? Critics were initially wary of the program’s cost and its government-centered plan, which tends to sway away from the idea of a laissez-faire free market economy. Likewise, looking at the numbers, it seems that small businesses are not fairing well under the stabilization act, but are doing better than they would if it was not enacted. As convoluted as that may sound, it’s the reality for small businesses – SBA has increased it’s loan-backing by 24% since the stimulus was signed, but 30% fewer small business loans were issued compared to July of last year.(1)
Unemployment also seems to continually plague the economy – 467,000 jobs were lost in June – an increase from the numbers in May. With unemployment stretches lasting longer than six months for many Americans, unemployment benefits will soon be running out.
The banks seem to keep failing as well. In fact, July 2nd of this year marked the shut down of seven more banks – bringing the tally to 52 for 2009 – 2008 only saw 25 banks fail.(2)
Despite these dismal numbers, experts continue to say that the effects of the stimulus plan still lie dormant since it is so new. Consumers also need to continue to spend if the plan is going to work – those with jobs should be frugal, but not stingy in order to help the economy flow. As always, investors should also speak regularly with their financial planners to discuss how this may affect their financial stability. Although most consumers are wary of lending at this point, the issuance of credit to consumers and businesses alike will always be a part of personal and business finances. Maintaining a stable and reliable relationship with your financial advisor is key to weathering the current financial storm.
(1) “Small Business Lending Falls Sharply” – Emily Maltby, CNN Money, July 2, 2009
(2) “Seven Banks Fail, Pushing 2009 Tally to 52” – Catherine Clifford, CNN Money, July 3, 2009