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Tuesday, February 2, 2010

Barofsky's Latest TARP Report

Neil Barofsky delivered his latest TARP report to Congress yesterday.

The government's bailout of financial institutions deemed "too big to fail" has created a risk that the United States could face a worse fiscal meltdown in the future, an independent watchdog assigned to review the program told Congress on Sunday.

The Troubled Assets Relief Program, known as TARP, has not addressed the problems that led to the last crisis and in some case those problems have festered and are a bigger threat than before, warned Neil Barofsky, the special inspector general at the Treasury Department.

"Even if TARP saved our financial system from driving off a cliff back in 2008, absent meaningful reform, we are still driving on the same winding mountain road, but this time in a faster car," Barofsky wrote.

The concept by which Barofsky says that TARP is contributing to the problem is Moral Hazard.

Moral hazard occurs when a party insulated from risk may behave differently than it would behave if it were fully exposed to the risk. In insurance, moral hazard that occurs without conscious or malicious action is called morale hazard.

By bailing these banks out we effectively told them that no matter what risks they take we won't let them fail. TARP was the epitome of a Moral Hazard. These banks received billions because their collapse was something our economy simply couldn't take. That's a license to be reckless. That's exactly what Barofsky is worried about. It's what many that opposed TARP were worried about. Furthermore, there's been nothing put in place to fix things and Barofsky was just as worried about this.

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