Banks repaying TARP is good

While I agree with commentators like Ed Harrison that the economy and the banks are far from recovery, I don’t understand the claim that banks should not have been allowed to repay TARP money.

Of course, the big banks would be better off with more capital — and some of them are sure to either fail or do more capital raising in the near future.  TARP did provide capital to the banks, but, as the CIT failure demonstrated, it did so in the worst way possible — as a direct transfer from taxpayers to the financial system with nothing close to a fair exchange of assets.

The fact is that reversing TARP is one of the best things the Obama administration has done — especially if there’s another outbreak of financial instability in the next few years.  Given the public’s anger about bailouts, any future government aid to banks is likely to be in the form of DIP lending — which is how TARP should have been structured in the first place.  I say good riddance to a profoundly flawed bailout program.

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