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10 January 2009

TARP - The Original Idea

Was the first idea of the TARP the better idea? Remember Paulson was going to purchase all the toxic assets banks carried on their books to free up their balance sheets. It essentially was getting them out from their debt. This would allow banks to begin loaning again without having to worry about old debt coming back and haunting them.

Then Paulson decided it would be better to give banks capital, which they could loan and get the economy jump started. Well, that isn't working and the banks want the first idea instead.

If you were one of the taxpayers to get a $600 dollar stimulus check last spring, did you spend it, save it or pay off debt? How far did it go? Did it change your life or somehow incent you to start spending again? Looking back, that plan didn't do anything to help the economy either. But what if the government paid off your mortgage, would that boost your confidence to spend?

That's essentially what the Treasury is doing with the banks. Their giving them a chunk of stimulus money that is a drop in the bucket of their problems. And at the end of the day, their problems are still there.

That's not to say there aren't problems with buying toxic assets. How do you determine what price to pay for them? And will banks want to sell them if they are priced too low? Pricing them too low could lead to more balance sheet write offs that might send the stock market lower. But giving banks some pocket change is just putting the problem in hibernation. I know what you're thinking, $25 billion doesn't seem like pocket change, but you have to keep things in perspective. Compared to the hundreds of billions in toxic assets, $25 billion isn't very much money.

Maybe it's just better to take the medicine all at once and get it over with so there isn't anything else that can be a problem later. We may go through a period of heartache, but dragging it on for a year or two and then finding out the problem is still there to prevent recovery could make the heartache we experience in a couple of years worse.

In fact, it seems like the government's hidden agenda is really to inflate us out of the problem by printing huge amounts of money. In time, the debt we are incurring will be worthless in inflated dollars. Problem solved. Historically, inflation rises at the same rate at which we print money. Lately, that rate has been around 40%.

Three weeks ago in Zimbabwe you could buy 20 loafs of bread for $10 billion Zimbabwe dollars. Today you can buy 1 loaf of bread with $50 billion Zimbabwe dollars. I can't image the inflation rate in the U.S. every reaching Zimbabwe's rate, but it won't be the first time in the world's history that a great economic power was brought down by runaway inflation.

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