Sunday, January 31, 2010

The TARP Inspector General sez:
To the extent that institutions were previously incentivized to take reckless risks through a “heads, I win; tails, the Government will bail me out” mentality, the market is more convinced than ever that the Government will step in as necessary to save systemically significant institutions. This perception was reinforced when TARP was extended until October 3, 2010, thus permitting Treasury to maintain a war chest of potential rescue funding at the same time that banks that have shown questionable ability to return to profitability (and in some cases are posting multi-billion-dollar losses) are exiting TARP programs.
Can you say "moral hazard"?

That's in the actual report, and not a summary by Calculated Risk (which is what the link points to).

The broader point of the report, and one that CR agrees with, is that the Feds have been engaging in moves to elevate house prices. And it's worked so far. But, as CR notes:
... there is a good chance that house prices will fall further as the government support is withdrawn since house prices appear too high based on price-to-income and price-to-rent ratios.
Atrios has said that much of the financial support is based on the idea that if house prices can be kept from plummeting, it might bridge the "bad times" until the economy picks up again. But is there solid growth (jobs, wages, consuming) anytime in the near future? If there is, then this crisis will have been straddled. If there isn't, then we might see a double-dip recession.


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