Friday, February 20, 2009

Yet More Evidence of the Treasury's Impotence

Yesterday a nytimes editorial complained that TARP money invested in bank holding companies did not go to banks, because the bank holding companies viewed giving money to banks as a bad investment.

Even before the first dollar of TARP money was paid, I explained how there are dozens of ways that the private sector can neutralize Treasury transactions. Because the market does not want to invest in bad banks, we will continue to discover the ways until the Treasury stops transacting.

Sadly, those who do not appreciate this very general principle of economics will continue to believe just a little more micro-management will render the Treasury potent. Professor Sharfstein himself wrote that dividends were one way the TARP would become impotent, but -- instead of seeing this as a general principle -- said that we needed only to prohibit bank dividends. It will be interesting to see what new loophole his discovers this summer, after yesterday claiming that all is needed is to plug an old one.

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