The NY Times reports that the new president is concerned about how banks are using TARP funds [JT: TARP=The Troubled Asset Relief Program , a US government program to purchase assets and equity from financial institutions to help improve the situation of the financial sector]
[President Obama] criticized companies that have used federal money they received under the financial bailout for low priority or wasteful purposes and promised not to let that happen. He cited “reports that we’ve seen over the last couple of days about companies that have received taxpayer assistance, then going out and renovating bathrooms or offices, or in other ways not managing those dollars appropriately.”A prominent economist emails me the following:
Discussion question.
Scenario 1. AmeriBank of Holland, Ohio, receives TARP funds and uses $20,000 to hire Joe the Plumber to remodel a bathroom in one of its banks.
Scenario 2. AmeriBank of Holland, Ohio, receives TARP funds and loans $20,000 to Bob the Baker to remodel a bathroom in his house.
Explain the difference in macroeconomic stimulus in these two scenarios.
Anyone want to venture an answer? (Just enter a comment below)
The difference in terms of purchasing immediate goods and services in the economy is nill -- whether the bank does it or Bob does it, the movement of the money from the government to the bank has created some demand and moved outward in the economy, and that is good. Fine.
ReplyDeleteBut in terms of TARP money stabilizing the credit system, scenario B is superior because AmeriBank now has a (let's hope) good loan on its books, which will earn interest for the bank and reduce the ratio of troubled assets to good assets. And that does not happen under scenario A.
Yes? No?