Wednesday, June 10, 2009

Exit of 10 Large Banks from TARP

It it noteworthy that the decision by the government to allow 10 large bank holding companies including JPMorgan Chase, Goldman, and AMEX to repay more than $68billion in loans and exit TARP has been greeted with some diapproval among the more liberal policymakers and media pundits.

They claim that allowing the banks to extricate themselves from government interference will hamper efforts at forcing the restructuring of the banking sector to limit executive compensation, participation in non-bank financial products, forced lending to credit defaulters, and other social programs. Such claims give some credence to the charge that TARP is a backdoor to nationalization of banking, and with it a model for nationalizing such other sectors such automobile.

In fact, the escape from TARP should be seen as a triumph of market forces. TARP hampered the ability of the banks to hire the best talent, which are necessary for long term competitive advantage, reduced flexibility in jettisoning broken business models, and straight jacketed management from dealing creatively with borrowers, lenders, shareholders and other stakeholders in the community. The freedom from government intervention is the only way the, admittedly wrenching, market adjustments can be made quickly so the macroeconomy can stablize.

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