What we really need to get the economy going again is a form of "TARP II". I know that's an inflammatory term, and as such I used it on purpose. However a TARP- like solution is about the best we could do in these times of slow growth and rising deficits.
Should we stimulate with more spending or should we rein in the deficit?
What I propose is something completely different which would stimulate without much spending (actually none, if it was successful), and therefore not increase the deficit. If it failed, it would be costly, but as you will see, if we are careful it shouldn't fail to any significant degree. The money in a spending stimulus on the other hand would be gone, whether it worked or failed.
Let me explain what it would be and why it makes sense now. The economy is stuck in a rut and needs a boost to prevent any more backsliding, let alone a double dip recession. Everyone says a stimulus is out of the question either, or both, because it doesn't work to create private sector jobs or that it will add to the deficit. Same for tax cuts, albeit from a different political perspective.
Banks aren't lending or businesses are not borrowing; take your pick. All I know is that we appear to be stuck in a rut.
Enter my TARP- like solution. The Federal government should offer to provide credit support to lenders who make loans to businesses to stimulate growth which in turn would lead to creation of jobs.
Right now things are at an impasse. Lenders have become so conservative ( twice burned?) and are reluctant to make even marginally risky loans. A degree of credit support from the government could put "close" but still too risky deals over the top and enable business to get much needed financing for growth. Since the credit support would be in the form of some level of guaranty to the lender, there would be no cash outlay by the government. The banks would be lending the money, the government would just be partially guarantying the borrower's repayment.
If these loan are as good as everyone who bemoans the banks reluctance to lend says they'd be, the government would never have to pay off on it's guaranty. Of course there would be some losses, but likely not very much. That's what happened with TARP; the government got all of its money back, plus a significant return, from the TARP loans to the banks.
In my scenario the government would not even have to make any loans to the banks; rather provide credit support (for a modest fee even) for credit worthy loans; just to break the current economic stalemate. If all went even reasonably well, there would be no increase in the deficit since no money would be put out and this kind of "pump priming" just might get the economy going again and reverse the viscous negative cycle in which we find ourselves .
Sadly our leaders and the media have so demonized anything that even seems like TARP, that this probably could never happen. We need to reverse the "big lie" that TARP was a government giveaway for the Fat Cats Bankers on Wall St. that did nothing for Main St.
It's a shame that as a result of demagoguery and political and media distortion this kind of low cost solution has become too "radioactive " to be used to get us out of this economic quagmire.
Eric
3 big points
ReplyDelete1. No political way in hell the govt could guarantee bank debt right now beyond the programs already in place. No way. This would be akin to a second bank bailout.
2. Even though it isn't paying out actual cash, the legislation would still "score" meaning cost $.
3. The system you describe is similar to the FFEL program which was used to finance student loans. Basically, private sector participants issue loans to students, feds back defaults up to 97 percent, rates are capped. Congress nationalized this program this year. Meaning, all new student loans, it's federal debt from the treasury.
Would be difficult to use the model of a recently nationalized program to encourage lending
1. I too agree that this would never fly politically, which is my real point. We have so demonized the banks and TARP that they are radioactive and even it was a good thing no one would believe it because of all the demagoguery. The "bailouts", if it's deemed to be one, would be to the businesses ( Main St) on whose behalf the guarantees were given.
ReplyDelete2. Also I know it would costs something because there would be defaults, but it won't be near as much as if we just spent it or taxes were cut.
3. I was really interested in your point #3 since it is the start for a model . My idea would be a govt guarantee of 5-10% (not 97%) of the loan. Such a partial guarantee might be just enough to convince banks to make somewhat marginal loans and get things going . Also I envision a temporary program that goes away in a year or two at most. Really just a "pump primer".
Sure, we can employ our credit like what we did for Freddie Mac and Fannie Mae. In theory, I shouldn't cost us anything. Problems invariably pop up though.
ReplyDeleteFHA may be a better example , since those loans are to commercial borrowers, even tough it's for multi-family housing. Unlike home loans, I believe FHA can require real more credit worthy borrower support in exchange for the government partial guaranty. Again I'm just looking for a temporary "fix" but I know how that goes!
ReplyDeleteHow has the FHA fared through this crisis?
FHA has held up pretty well, because their original mandate was to provide housing for low income families.
ReplyDeleteWhat about reinstituting ACRS, that aggressive depreciation allowance that helped propel commercial property prices in the early 80s?
http://www.nytimes.com/2010/10/01/business/01tarp.html?hp
ReplyDeleteThe recently enacted Small Business Act (not its exact title)does somewhat you are suggesting. It does a number of very significant things for business loans to small businesses, not real estate except for owner occupied buildings. As an SBA lender, I can tell you that we like the concept for our customers, but I strongly predict misuse of the program will bring problems in the next several years, including substantial losses. That may be a price the SBA is willing to take to pay for some good, but I would think, non-statistically that it seems a short-term benefit which will be followed by longer-term disasters.
ReplyDeleteYour actual suggestion of a marginal (5%,10%, or so) federal enhancement to stimulate a loan makes little sense to me. Only significant enhancements have any practical value in decision making. I would add that marginal government grants of 5% or 10% for borrowers to have some equity in a transaction are counterproductive.
Loans need to be made to viable business entities, just like home mortgages needed to be made to viable households.
Tax credits or advanced depreciation incentives seem to work, because they affect the timing of business investment decisions.
Trying to make business loans that are not fully viable on their own is the equivalent of pushing on a string and seldom works, compared with pulling a string which typically works.
I think professor's one asumption is that most of these loans are viable. and the main problem is borrower and lenders both lack confidence.
ReplyDeletethe rate of garanty should be low, so as to prevent moral hazard problem. Whether 5% -10% is enough, it is hard to say. But the government can increase it step by step so as to see which percentage is optimal.