Wednesday, November 12, 2008

What Has TARP Accomplished?

Back at the end of September, as I note from this post at the time, Congress was wrestling with the passage of the then-claimed, absolutely necessary $700B TARP legislation.

September's S&P return was -8.9%. Clearly, the deteriorating equity market and cessation of lending and markets for structured instruments lit a fire under Treasury, the Fed and FDIC to do something.

As economist Art Laffer noted in a Wall Street Journal article, about which I wrote, here,

"Then we have this administration's panicked Sarbanes-Oxley legislation, and of course the deer-in-the-headlights Mr. Bernanke in his bungling of monetary policy.

Whenever people make decisions when they are panicked, the consequences are rarely pretty."

So, here's my question, inspired by a comment from CNBC's Rick Santelli this morning.

If the TARP was so necessary, and was the right, or an effective solution to our financial turmoil, why did the S&P decline by a further -16.7% in October? That's almost twice September's decline!

Santelli's insightful comment was, as usual, in response to a typically nonsensical utterance by CNBC's Steve Liesman. The latter insisted that the TARP was absolutely essential to the health of the financial system.

Santelli calmly noted that, in contrast to Liesman's description of the September market free fall, we now have 'slow fall.'

Whether fast, or slow, Santelli's point was, I believe, that the TARP's existence has, if anything, apparently accelerated, and certainly failed to halt further market deterioration.

That's when I was inspired to go to my own files and retrieve the monthly S&P performance for September and October. Not only did the TARP have no positive effect, but our current equity market situation is, by some measures, a reflection of the lowest level of confidence in those markets in many, many years.

For example, one of my equity long/short allocation signals is at its lowest level since 1982. The other, which is the trailing S&P return over a period of fixed length, has never been this low in over 30 years. Which, considering the time periods involved, probably means perhaps not even in the entire time that there has been an S&P500 Index.

Now, with this week's clamoring by Congress to release TARP funds to rescue GM, Chrysler and Ford, we see it has become, predictably, a general-purpose feeding trough for desperate firms, financial or otherwise.

Former Federal Reserve Board member Fred Mishkin warned, in extended comments this morning on CNBC, that including less-regulated, non-financial companies in the TARP is a very, very dangerous step. He noted the necessity of a healthy financial system, most of the players in which are already subject to heavy regulation.

Adding various weak and dying companies on an ad hoc basis, Mishkin noted, is to essentially open the Treasury to anyone who wants help.

Hardly the conditions under or terms on which the TARP was rushed through Congress.

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