Garcia, Gillian G.H. --- "The Troubled Asset Relief Program: Has Forbearance as Far as the Eye Can See Saved the US Economy?" [2011] ELECD 489; in LaBrosse, Raymond John; Olivares-Caminal, Rodrigo; Singh, Dalvinder (eds), "Managing Risk in the Financial System" (Edward Elgar Publishing, 2011)

Book Title: Managing Risk in the Financial System

Editor(s): LaBrosse, Raymond John; Olivares-Caminal, Rodrigo; Singh, Dalvinder

Publisher: Edward Elgar Publishing

ISBN (hard cover): 9780857933812

Section: Chapter 4

Section Title: The Troubled Asset Relief Program: Has Forbearance as Far as the Eye Can See Saved the US Economy?

Author(s): Garcia, Gillian G.H.

Number of pages: 26

Extract:

4. The Troubled Asset Relief Program:
has forbearance as far as the eye can
see saved the US economy?1
Gillian G.H. Garcia

4.1. INTRODUCTION

As work began on this chapter, the Republicans had just won the
`Kennedy seat' in Massachusetts ­ a most democratic of states. How could
this have happened? Health care reform; `the economy, stupid!' includ-
ing unemployment, the deficit, and the housing markets; wars; the cold
weather; bankers' bonuses; Wall Street punishing Main Street; and disgust
with politicians and regulators in Washington. Distrust of the Troubled
Asset Relief Program (TARP) and its companion programs that were used
to contain the financial crisis epitomize the reasons for `the winter of our
discontent.'2
There are two contrasting approaches to dealing with a financial crisis.
The first is to expand the financial safety net so that it allows the authori-
ties to forbear from taking punitive action against failing institutions.
Under forbearance the regulators relax, or do not enforce, the existing
safety-and-soundness rules. In particular, they relax capital requirements
to allow weakened banks to continue operating, probably with subsidies,
until they earn their way out of trouble. Forbearance was used to nurse the
US's weakened major banks during the 1980s Latin American debt crisis.
Congress enacted forbearance through phoney capital at the beginning
of the 1980s S&L crisis, and the thrift regulators then, and more recently,
practiced it to the extreme in their oversight of the banking system by not
enforcing the existing ...