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“Why did the  unemployment and economic slowdown predictors were certain would occur if T.A.R.P. were not enacted, occur after T.A.R.P. was enacted?”

The exercise is based on the events in the 2011 film “Too Big To Fail,” a copy of which is in the library.  We will also revisit portions of the film in class.  The exercise follows on our discussions of the reasons for The Great Depression of the late 1920s and 1930s.

T.A.R.P. is an acronym for “Troubled Asset Relief Program,” the attempt in 2008 by then U.S. Treasury Secretary Henry Paulson, Ben Bernanke, Chairman Of The Federal Reserve and Timothy Geithner, President of The Federal Reserve Bank Of New York, to unfreeze the financial system by getting banks to trust each others’  debt-created money and restart lending.  They tried to do so with the following actions, using an emergency Congressional appropriation of $750 billion and the unlimited buying power of the Federal Reserve:

1.  The Treasury purchased at face value “securitized” bundles of millions of home mortgages created by the banks, half or more of which mortgages were in default.  These “securities” were approaching worthlessness, but setting on the books of the big player banks both in the United States and around the world.

2.  Compelled the 10 largest U.S. banks–commercial and investment–to accept a “capital injection” of $125 billion in return for partial Government ownership as holder of proportionate “preferred shares” (non voting) of stock in the banks.  The idea was to stimulates the banks to restart lending to the private sector.

3.   The Federal Reserve embarked on a bond buying program called “quantitative easing” by which to increase the money supply.  Every month, the Fed purchased billions of dollars in private sector debt of all sorts though not including stocks, but including “troubled assets” as a stimulus to the wide economy.  Q.E. also included injection by the Fed of billions of dollars into “federal funds” available to the banks.  “Federal funds” are credits/monies available to each commercial bank in excess of the 10% of its liabilities to depositors each bank in the country is required to maintain in an account with its local Federal Reserve Bank.  Ours is in San Francisco.

4.  Injected $85 billion into “American International Group” (“A.I.G”), the largest insurance company in the world, which in 2008 was running out of cash due to improvident sale of “credit default swaps”  (“C.D.S.”) to every major bank in the world by Joseph Cassano, head of A.I.G. Special Financial Products in London.  [ Your production insurance policy has a good chance of being underwritten by an A.I.G. division.]  A “C.D.S.” is an agreement by a first party (A.I.G.) for a premium payment to assume a second party’s right to receive earnings from a security in consideration of making good any default loss by the second party–“default swap.”  While the parties swap rights to earnings on a security they also swap liabilities, i.e., the risk of default in the venture underlying the security.  When the value of underlying mortgage backed securities covered by a CDS collapsed A.I.G. was forced to indemnify CDS buyers all over the world for loss in value.

Prime questions are:  Did all of these measures designed to restart and facilitate lending work and for whom?  What class or classes of borrowers.  Or, if pertinent, why, after receiving all of this assistance did banks not resume commercial and personal lending to the wide economy?  What really happened?  Where did that $750 billion and $ Trillions in  Q.E. go?  Who, if anyone, actually benefited?   The Fed has a balance sheet of over $5 trillion and off balance sheet purchases of over $9 Trillion.  Where did all of this money go?  What enterprises did it fund? 

Your project should discuss why after all of the above measures to stimulate economic activity the general economy collapsed into recession anyway.  We have plenty of time and will take the time to talk about why this happened.  We will also discuss what should have been done that was not done in order to avoid the unemployment, home foreclosures and other economic disasters, what was done that didn’t need to be done and what, if anything was done that shouldn’t have been done.  Why didn’t Great Depression 2.0 occur as Bernanke feared?  These will be the basic analyses in your paper.