Why TARP Can Still Work

by Tom Wise

It's the program that started it all - TARP - Troubled Assets Relief Program. However, though it served a purpose of sorts, it didn't do what it should have done.

First, with what can we agree? Certainly, that troubled assets are at the core of the current (August 2011) international financial crisis. Why is that true? Basically, the high-risk mortgages which were bundled, secured, and divided into shares of a toxic pie (mortgage-backed securities) have not yet been resolved. Though many homeowners have or will default on their home loans (the sub-prime debacle), these poisoned investment vehicles still reside on the most influential balance sheets. They cannot be sold again - everybody knows what they are and nobody wants them. They cannot be discharged - the debts are immense and the stakes too high. Who is willing to take the fall? No one. What are the ramifications for inability or refusal to meet such obligations, however unfair? Perhaps world war.

Second, why was TARP ever suggested? The overarching purpose for TARP should have been to absorb the poison. The United States in 2008 had the capacity to take on trillions in debt and to liquidate toxic mortgages at a fraction of perceived value while still maintaining a grip on some financial dominance. That time has passed. TARP was misguided from the start, the funds used to bail out institutions rather than to fix the problem. Thus, the troubled assets were not mitigated but hidden, and not well. But now, August 8 2011, Obama and the Democrats have already squandered the capacity of the United States to take on such a burden, and the final nail in that coffin is the S&P downgrade to AA+ this past weekend.

The root of this entire problem is the will. Many in power have been and still are on a path to break the capitalist system, quite a few intentionally so. Many more have been and remain too afraid to dissent, seeing writing on the wall. Others with brilliant ideas have been and will be quickly intimidated. The few who remain are and shall be isolated as quacks and "terrorists." Thus, power and politics, greed and fear, perpetuate the same blockade over and over.

Third, what is the solution? The only method by which to eradicate the troubled assets is for a willing host to take on the parasite. That entails a strong host or else an unwilling participant. Now that the world has witnessed three years of selfishness, no strong nation will (if they ever were interested to) volunteer. This means the only exit is a type of sweet force.

There are presently several nations that have a stake in the highest form of society (like it or not, the Western way of life) which also are under siege financially. Specifically, Greece, Italy, Ireland and Spain are players with deep issues. It would be to everyone's benefit if one of these were given incentive to receive the troubled assets which plague the world. The amount in dollars (perhaps 40 trillion) doesn't matter because the outcome will be default. However, not default that leads to war or isolation but to reward! That is, once a nation in trouble, say Greece, agrees to become the host for the parasite (toxic assets), that nation will be permitted by those who hold such debt to discharge it without aggressive repercussion. In essence, a purge for the world and a reprieve for Greece.

What happens to those who previously held the debt? They take a loss on the balance sheet, minimized by TARP funds received from both Greece, the involuntary host nation, and participating nations with an interest (that is, the entire "civilized" world). Perhaps the loss is as much as 80% but it's better than holding worthless assets that forever corrupt balance sheets and creditworthiness. As further motivation, those who do not take advantage of this offer would be actively rebuffed in the future, becoming economic pariahs. It could be that the world might divide over this into two separate economies but that's fine. It should be that weaker nations are not treated the same as stronger. We're not looking for parity but economic purity.

What happens to Greece, the host nation? Initially, a gigantic upheaval. The currency becomes worthless and they would be entirely dependent on outside help. This should not cause too much of a problem if all involved do their share. While Greece absorbs the blow, its currency is reset to zero. Greece would be permitted to establish intra-nation trade until such time that its economy was able to strongly participate again on the world stage. In effect, Greece would be entirely dependent on the financial charity of other nations but would still able to intrinsically feed, house and protect its people in a manner commensurate with its history (that's why we can't ask Zaire or Nepal to take on this task).

What happens to the homeowners? The charity towards Greece should not be extended any further. Those who can afford their homes can stay, and those who cannot must leave. There can be no free lunch for Americans and others on the back of Greece. That will only cause Greece to rebel and fail (a natural reaction) rather than accept and prosper. The backlash from displaced homeowners will likely be sharp but not so much as riots in the streets from a worldwide currency collapse, which is the future without such a plan. In other words, to spare these "poor" mortgagees we must sacrifice the stability of the world. Instead, those without homes should find charity without government intervention, which interference was the absolute cause of this mess. Families should congregate, friends band together and pool resources, people work harder. These things are very possible if the economy improves, which it absolutely will if the balance sheets are rectified in this manner.

The result? In time (perhaps ten years), every nation, including Greece, would be stronger and have a less stilted economy. True fiscal conservatism will have been victorious over the errors of "handout" liberalism. History will express that the second decade of the 21st century was a turning point for humanity, as much in compassion as in finance and economics.