The TARP, optimistically..

Some philosophical context


I think it's both timely and important to note the distinction between optimism, pessimism and reality. Most people think that forgetting reality is the way to remain optimistic. This is the wrong way to approach reality. The truth is that understanding reality is the only way to manage expectations and remain optimistic. Expectations are usually met for someone who has a tangible grasp on reality. The optimist also understands that they can mold their own reality but they can't choose the clay. On the other hand, the person who does not have a tangible grasp on reality finds themselves is always disappointed by unrealistic expectations. This psychological house of cards is sometimes made even worse as they create more undue optimism to fill their void in troubled times, which can only lead to a terrible downward spiral in the end.

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TARP (tar⋅pau⋅lin) - [tahr-paw-lin, tahr-puh-lin]

-noun

a protective covering of canvas or other material waterproofed with tar, paint, or wax.

When it comes to the economy, it's clear that many people still misplace optimism with optimistic realism, despite a notable improvement in this regard in recent days and weeks. Many people still believe the purpose of the TARP (Troubled Asset Relief Program) was to increase lending and stop foreclosures. It wasn't. The purpose was simply to stabilize financial markets and stall the market correction following the failure of Lehman Brothers collapse. Major banks were failing by the week at the time, with no clear end in sight. The system was collapsing and the fall had spread to the broader market. The economists that saw the current problems of the market predicted the fair (unadulterated) value level of Dow Jones Industrial Average was (and still is) about 4,000 (Thursday's close was 8,212). The program eventually passed congress and equity markets stabilized. The .DJI has been flat since October 10, 2008, about the time it became clear that the bailout would pass in some form or another. When the Obama and Bush economic advisers realized is that the correction was about to resume it's course, with more defaults coming from the retail sector in addition to continuing subprime loan defaults, they called for the release of the second $350B bale of the TARP.

The real objective of the TARP was to diffuse the full extent of a free market correction. Without the TARP funds, the mark-to-market net worth of nearly everyone with equity would fall by about half (this includes RRSP's, 401k's, home equity, etc.). Foreclosure rates would have accelerated in the opposite direction of equity. Citibank, Bank of America, Fannie Mae, Freddie Mac, Chrysler, GM, AIG would all obviously have failed with catastrophic consequences, along with many others. The economy would need a combination of pay cuts and job cuts; if fewer people willingly took pay cuts, more people would be forced into job cuts (this still holds true despite the TARP). It's no surprise that no acting government, republican or democrat, would be willing to face such a reality and opted instead for inflationary market interference instead.

I'm not personally in favour of these bailouts unsustainable tax cuts, debt loads, deficit spending and stimulus handouts. They will ultimately just prolong and extend the natural correction as well as stagnate longer-term growth for years, perhaps even decades. Political stability will become rather precarious as it becomes clear that debts cannot and will not be repaid. The greenback will have questionable value as the dollar becomes mortgaged (also see America's Fundamentals). Nonetheless, it's important to be onside with reality. This is the only way to see the glass as being half full.


You're Richer Smarter Than You Think.
Kent Carter