The Special Inspector General for the Troubled Asset Relief Program (SIGTARP), the supervisory body for investments held or guaranteed by the U.S. Treasury, was established under the Economic Stabilization Act of 2008, with the first Special Inspector General Neil Barofsky sworn into office on Dec. 15, 2008.
“SIGTARP has an unwavering commitment to protect taxpayers who funded TARP. SIGTARP has conducted oversight of TARP funds and has promoted transparency related to TARP through 13 quarterly reports and 17 audits and evaluations,” stated the latest SIGTARP Quarterly Report, published on Jan. 26.
On inception, the Troubled Assets Relief Program (TARP) was heralded as the savior of the U.S. economy, by some for infusing over $400 billion into the economy, and by others as a program for government support of corporations that are considered too big to fail, the survival of which should have been left to market forces.
SIGTARP will exist at least until or beyond 2017 or at least as long as the U.S. Treasury retains investments in corporations or banks or guarantees payment of defaulted loans related to the 2008 financial upheaval.
“TARP morphed beyond a bank bailout into 13 programs, some of which are scheduled to last until as late as 2017,” according to the quarterly report.
Bailout Principle Setting Dangerous Precedent
“The implicit guarantee that came from the Government’s unprecedented intervention resulted in moral hazard, and companies continue to engage in risky behavior,” the quarterly report said.
SIGTARP, and not only SIGTARP, but many academics and economists, pointed out that the bailout of the U.S. financial sector and certain corporations by the U.S government sets a dangerous precedent, as it provides an implicit guarantee for future bailouts, providing these entities with an incentive to take risks far above what is acceptable, risks they wouldn’t take without such a guarantee.
The crux of the matter is that America no longer adheres to a true capitalistic theory, one that requires free entry or exit into or out of the market, is governed by the law of supply and demand, and not subject to government interference.
Corporations and financial institutions are allowed to grow into gigantic entities, which if they should fail, could create an environment that is no longer able to sustain the economy, thus bringing the theory too big to fail to life.
“Classical economists understood the dangers of large corporate organizations: they inevitably tend toward monopoly. … If bigness in [sic]truly necessary, these corporations need to become government agencies. If not, they need to be made smaller,” according to an article by John E. Ikerd, professor emeritus of agricultural economics at the University of Missouri.
Secondly, the too big to fail theory brought with it not just the implicit promise of a government bailout if a corporation takes unsustainable market risks, but also the risk of runaway executive compensation packages, which foster, instead of reigning in, excessive risk taking, as SIGTARP points out.
“Because companies generally have shown little or no appetite for reforming executive compensation practices, the economy remains at risk that compensation could play a material role in the event of a future crisis,” the SIGTARP report said.
SIGTARP staff expressed concern about the new regulations under the Dodd-Frank Act (Dodd-Frank Wall Street Reform and Consumer Protection Act), as they are in their infancy and still under development. These regulations may not have gone far enough to reign in excessive risk taking and have not yet demonstrated that they are an effective tool against it.
“All of the regulations required under the Dodd-Frank Act are not final and their effectiveness remains to be seen. … Taxpayers are looking to the regulators to protect them and to help reinforce the stability of the largest firms and the financial system so that history does not repeat itself,” the SIGTARP report states.
Next…TARP’s Financial Aspects