The unavoidable discretion in price setting can, according to critics, only lead to two outcomes: a mark-to-market price, which however would provide no relief as it would merely crystallise existing losses or even unveil new ones or a higher price (the most likely outcome) which, while providing relief, would transfer the losses from the sellers to the taxpayer, helping moreover those financial institutions that made the worst investment decisions. The most relevant objection to TARP concerns the price at which the Treasury would buy the troubled assets, most of which have no market and are otherwise difficult to price because of their opaqueness and complexity. TARP attempts to address the first aspect, while its critics argue that public intervention should solely aim at the second. There are two related aspects to the crisis besetting financial institutions which are now shrinking their balance sheets by cutting credit to the economy: (1) the illiquidity and falling value of some of their assets, and (2) a shortage of capital, as only 70% of the recognised losses have so far been matched by new capital. Second, however, once the Treasury and the Fed have jointly announced their emergency program, with the stark motivation that it is the only way to avoid an imminent meltdown, doing nothing or unduly delaying its implementation would increase uncertainty and plunge the markets into chaos. An earlier pre-emptive move (a solution similar to TARP was proposed in the Financial Times in April and in Vox and in CEPR Policy Insights in May) may have prevented the acceleration of the vicious feedback between the falling value of the assets of financial institutions and their capital and funding requirements. First, its effectiveness is impaired by coming too late, as a hastily defined measure of last resort after the crisis has become acute. Two preliminary remarks on the timing of the TARP initiative (or, for that matter, of any other proposal as bold and sizeable as TARP).
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