It's all over the news.  TARP (Troubled Assets Recovery Program) is apparently not only subject to fraud (no!), but it's also not working (gasp!  NO!) because, surprise, surprise, none of the banks given money are lending more.  The experts are flabbergasted as to how this could be; "after all," they say, "we've given them all this money!  They should lend to us more!"  Once again, they try to reach a simple goal by going over the river and through the woods to reach something that didn't even need rerouting.  The problem is (apparently) that people aren't spending enough because the banks aren't lending.  The easy solution would be to stop soaking up so much private capital and to simply allow the money to begin flowing again, starting with investors taking risks on production and business and working its way down to small spenders.  But no, it can't be that simple!  Because who gets left out of the loop?  The big-money campaign donors who see their "donations" as "investments" in the protection of their wealth and assets.  Uncle Sam to the rescuuuuue!  They take the money from the small spenders and tax-payers, package it up and hand it to their donors in order to keep their business afloat, and tell them to start paying it back immediately.  Now, Uncle Sam is bereft with anger that the banks he gave money to aren't lending!  Not only are they not lending, rates are going UP!  How can this be??  Apparently, Uncle Sam has lost a grip on reality and basic applied economics.

Suppose you get floated a loan from one of your friends who needs it paid back a couple months.  What are you going to do?  You're going to make that money last as long as possible by cutting back on your spending and doing what you can to make money so you can pay him back sooner, right?  Of course you would, you're vulnerable to the Natural Laws of economics.  If you went out and spent it all at once, you'd have to start from scratch in order to pay him back, it'll take longer for you to do so.  This is the case with the banks, it's simple, smart, applied economics.  They want Uncle Sam off their backs, they figure the best way to do so is to pay him.  They got a loan to stay afloat, so they're staying afloat, using the money wiser so they don't have to raise more revenue from scratch in order to pay the tax-payer back.  They're aware of the hatred directed towards banks at the moment so they know they have to stay on "the Peoples'" good graces, which requires them to pay back the loans as soon as possible and to remove themselves from the dole.

It makes good sense what they're doing.  They use the TARP money carefully, using it to pay for operation costs and a few prudent loans to ensure a return on the loan with interest to make the money they borrowed back and maybe (kids, cover your ears!) a PROFIT.  One of the problems is that Uncle Sam wants the money back soon, which means the banks have to rake in a lot of money soon in order to pay back the TARP money, so they sit on as much as possible, prudently lend it to safe borrowers, and increase interest rates and fees in order to make more money to pay back to the TARP. 

This would be great if just keeping the banks afloat was the spoken intention of TARP but it wasn't.  We were told that TARP would "unfreeze credit" and "get banks lending again" (which someone--ahem--said was nonsense when that was the stated case) and it clearly hasn't for the above stated reasons.  The government doesn't want banks to lend prudently, it wants the banks to lend indiscriminately as it did before the crisis.  The problem is that the behavior the government is wanting to advocate is what got us in the mess.  "Cheap money" (to borrow a nonsensical term from the idiot Ed Schultz) got us in this mess, lax lending standards perpetuated by government regulation got us in this mess and TARP was meant as an extension to the same games and the same lie.  TARP is simply a new deck of cards to add on to the already crumbling house currently on the table.  If there is anything that makes less sense, it's continuing the plans of "Helicopter" Ben Bernanke when they've done nothing but dig a deeper hole. 

In short, the banks aren't lending not because they're greedy or evil or in search of those damned (kids, cover your ears again) PROFITS (!!), it's because it makes absolutely no economic or financial sense to indiscriminately loan borrowed money you're expected to pay back.  Would you?  Ask yourself now, if TARP makes no logical sense whatsoever, doesn't do what it claims to do, and is susceptible to fraud, why do it?  Good question, I'm glad you asked!

F.A. Hayek and Ludwig von Mises both talked about a theory they called "spontaneous order" which was, to put it briefly: where men were free, order would follow.  This is a basic idea based on Cicero's "Natural Law" which states that logic, God (Cicero was a monotheist despite being Roman), reason, all rule the universe with concrete principles and laws from which it can never err.  These basic principles are the building blocks of civilization and have to be personally discovered through life.  This was the foundation that would form the ideas of the Enlightenment now known as "classical liberalism". 

All the thinkers of this school of thought viewed Natural Law, be it administered by God, reason, or logic, as the foundation for civilized progress.  The ultimate end being a people without need of control and government micro-management in their lives.  The doctrine of classical liberalism states that as technology advances and the populace becomes more enlightened and better educated, governmental powers lose their purpose and fade into obsolescence.  This has been happening since the beginning of the American Experiment which is the ultimate enemy of the concept of a ruling power.  With an ever progressing world full of technology and many of the functions of government being obsolete for over a century now, it has to maintain its relevance and over compensate when it acts in order to prove it is still needed.  In effect, it holds civilization back by toying with the economy and manipulating the free market guided by Natural Laws. 

One way it has maintained its relevence is by sticking to the game that first developed the need for government: protection.  Many businessmen develope into desperate opportunists seeking to protect and maintain their standing in society so in a desperate bid to get ahead, hire the government to protect them through tarriffs or favors, more regulations with strings like insurances with bail-outs if the company goes belly-up.  It uses this illusion to make the case for its purpose as a driver for the economic engine of the nation.  This, of course, is false in liberal thinking because the forces of Natural Law guide the marketplace through personal decisions as well as corporate.  The government, with TARP, is trying to make a case for its relevance.  However, insodoing, it's proving its obsolescence through forceful, clumsy action that defies logic.  It's trying to manipulate Natural Law, but they will find Natural Law to not be manipulated.  TARP is in violation of market forces and Natural Law.  It's illiberality is regressive and draconian and will be the death knell of its case for aggressive action.  And this, at the crux, is why TARP will not work.

And that's the Real Spit
-WilliamPitt