The Case Against Ron Paul Pt. 2Posted: March 12, 2012
Definition of ‘Troubled Asset Relief Program – TARP’
A government program created for the establishment and management of a Treasury fund, in an attempt to curb the ongoing financial crisis of 2007-2008. The TARP gives the U.S. Treasury purchasing power of $700 billion to buy up mortgage backed securities (MBS) from institutions across the country, in an attempt to create liquidity and un-seize the money markets. The fund was created by a bill that was made law on October 3, 2008 with the passage of H.R. 1424 enacting the Emergency Economic Stabilization Act of 2008. The Treasury will be given $250 billion immediately, and the President must certify additional funds as they are needed. The additional funds will be distributed as $100 billion, and then as the final $350 billion is given, Congress has the right to not approve the additional amounts.
Investopedia explains ‘Troubled Asset Relief Program – TARP’
Global credit markets came to a near stand still in September 2008, as several major financial institutions, such as Lehman Brothers, Fannie Mae, Freddie Mac and American International Group, went under. In a few surprising moves, heavyweights Goldman Sachs and Morgan Stanley even changed their charter to become commercial banks, in an attempt to stabilize their capital situation. The bailout will attempt to increase the liquidity of the secondary mortgage markets by purchasing the illiquid MBS, and through that, reducing the potential losses that could be felt by the institutions who currently own them.
In October of 2008, revisions to the program were announced by Treasury Secretary Paulson and President Bush; allowing for the first $250 billion to be used to buy equity stakes in nine major U.S. banks, and many smaller banks. This program demands that companies involved lose some tax benefits, and in many cases incur limits on executive compensation.
What this comes down to is that the U.S. Government had bought out failing mortgage companies, to stave off their losses with some sacrifices. This wasn’t purely a corporate favor, though, to save some people’s paychecks. The crisis would affect the consumer too, and TARP had an effect.
Ron Paul’s Stance
Why was Congressman Ron Paul opposed to this? Because it’s a bailout! Surprise!
As a general theory, Congressman Ron Paul has opposed any form of bail-out, arguing consistently that we should let it sort itself out. Indeed, in opposition to the bill, he had argued that allowing the failing banks to collapse and file bankruptcy is the preferred option since the free market would allow it to stabilize on its own. However, it seems the Congressman ignored the effects it would have on consumers.
The Subprime Mortgage Crisis is terribly, horribly complicated to fully understand to the average person. Even a preliminary glance at researching the financial event presents a complicated situation of what happened, the effects, and all in-between. If you’re not even remotely into the financial jargon and presentation, it won’t make sense. It involves artificially inflated prices, fraud, false projections and also several mistakes on top of it all.
However, here’s the issue about TARP that has worked out for the consumer, since it’s the entire point we should care: Without it, or some form of bailout, affected mortgages would default. When a mortgage defaults, people lose homes through foreclosures. Despite your stance on bailouts, or an interpreted view of this being a special interest, millions of people would lose their homes if something wasn’t done. Yes, it’s a band-aid, but it allowed the process to be slowed until more can be done.
It’s one solution that would protect many consumers (and some companies), because something needed to be done. Is the alternative really worth such a high cost in collateral damage?