Make us your home page

Focus on bank solvency

Some six weeks after its enactment, the Treasury Department's Troubled Assets Relief Program (TARP) is itself, well, troubled. Treasury Secretary Henry M. Paulson Jr. has shifted the $700-billion plan's focus from the purchase of distressed securities to the direct injection of public capital into banks and other financial institutions — which Treasury then expanded to include providers of auto loans and, possibly, credit card and student loans. These midcourse corrections were pragmatic, but they put a crimp in Paulson's credibility. He also stands accused of letting banks spend too much on dividends and of not doing enough to help homeowners. Members of Congress are demanding to know what the public has gotten for the $290-billion Paulson has committed so far. In response, he and other federal banking authorities have begun jawboning the banks to lend more and to modify more mortgages.

History will judge whether Paulson's course demonstrated a healthy flexibility, as his supporters say, or a debilitating rudderlessness, as his critics contend. We do think, however, that almost anyone else in his position would have struggled to manage the conflicting pressures. Government had to act to prevent a financial meltdown. But once the government stepped in, it could not recapitalize the banking sector and jump-start lending all at once. Bank capital will not grow if financial institutions take government money with one hand and immediately lend it all out with the other. One objective has to take priority over the other.

TARP has arrested a downward spiral in the financial system. As Federal Reserve Chairman Ben S. Bernanke told Congress this week, the cost of interbank short-term funding has dropped since mid October, and corporate bond issuance is up a bit. But banks remain highly indebted and extremely fragile; it is unrealistic to expect a gusher of new loans, especially when demand for credit is weakening because of recession. As Paulson noted Tuesday, TARP "was not intended to be an economic stimulus or an economic recovery package; it was intended to shore up the foundation of our economy by stabilizing the financial system." The financial authorities should be encouraging banks to raise capital, not only through government aid but through the sale of stock. Restoring financial institutions' long-term solvency and, hence, their long-term ability to carry on normal lending should be the program's top goal.

Focus on bank solvency 11/19/08 [Last modified: Thursday, November 4, 2010 10:00am]
Photo reprints | Article reprints

Copyright: For copyright information, please check with the distributor of this item, Washington Post Editorial.

Join the discussion: Click to view comments, add yours