What Will Tomorrow Bring: the TARP Bonanza

To my chagrin, TARP passed without consideration of other options ... and with a disgusting dose of pork which had NOTHING to do with our current financial situation. The worst of Washington yet again.

So what will Wall Street do in response to this shiny new program?

• A number of banks will take this opportunity to PASS. They will recognize that doing so will put them at a strategic long-term advantage over competitors who will be hamstrung by the plan's restrictions. They'll be able to spin this to their PR advantage as they swagger that they're too strong to need such handouts.


• Accontability will be a joke, as will the valuations used. Nobody except the sellers will do enough due dilligence to understand what goes on.


• There has already begun a feeding frenzy of asset managers and prime brokers pining to become "financial agents of the Federal Government" (as they're called in the text of the act). Those cozy enough with their regulators and the Treasury will win these noncompetitive contracts will help Hank blow his new riches. These will be the biggest winners of the whole event. I don't like to drop names, but ... cough, cough, Goldman, Chase, cough.


• US Debt will march north. It will get more and more expensive to find lenders. Thus, treasury yields will go up. This means the cost of serving the national debt will go up. This means the government will have less to spend on other things ... OR they'll just continue to borrow. One of the "sweeteners" in the final TARP was to raise the national debt ceiling got raised to an unfathomable $11,315,000,000,000.00. Oh, and "any amounts provided in this Act shall not be counted for purposes of budget enforcement." At some point, we pass the number we'll ever be able to repay. The country becomes that downtrodden dude who will take 137 years to pay off his credit card (at the minimum payment) ... but with several score more zeros. Then the choice is:
• Undertake a painful, suicidal "fiscal austerity" program like we've imposed on many a Banana Republic
• Default on the debt
• Inflate the currency until all those zeros aren't so daunting to pay off


• My prediction: Inflation will march north along with the debt. This will throttle both savings and borrowing in the US. It will depress the value of the Dollar. It will shave points off growth. It will eat away asset values of ordinary Americans and provide a disincentive to save.
  
• On a brighter note, Europe, Southeast Asia, India, and South America will experience 1.5x the pain we do here in the US.