Lending out the TARP funds

So ... what should banks do with their TARP funds -- the money Uncle Sam has given them under the bail-out program Congress enacted in September?

Given them to their top executives? Good idea. "Job well done guys, you led your company into so much trouble that the feds had to give you money. Here's your personal chunk!"

Let's assume, just for giggles, that some of it won't simply be divvied up among the honchos in charge as takehome. What should they do with the rest? Lend it out to the buyers of homes or of cars and large appliances? lend it out to businesses and entrepreneurs for start-up ventures or expansions?

Or just sit on it and call it a capital reserve? There has been some sentiment that larger capital reserves are good. If the balance sheet looks better, that fact might increase the confidence of bank counter-parties, hastening a return to normalcy.

Frankly, it seems to me that the argument gives much too much importance to cosmetics.

Banks can only be self-sustaining private corporations, then can only cease to be wards of the state, if they get themselves back in the loan-extending business.

Does this mean government should use its new leverage as the provider of the capital infusion to order them to make loans? Heaven forbid! Japan's policy of directed credit, once seen as part of the "Japan Inc." juggarnaut, is now regarded by almost all who've studied it as a colossal failure. South Korea's efforts at directing credit have likewise amounted to waste and the promotion of stagnation.

So, you might ask: what should be done? If banks aren't lending out the money, and should be lending out the money, then how can they be induced to do so?

IMHO, the down side of the housing cycle simply has to play itself out. There won't be any lending activity in that particular field for awhile. A burnt cat doesn't get right back on the stove.

The automobile market is a different matter. If banks were convinced that there was once again a basis for a sound US auto industry, they would resume lending both to that industry, to its accessories (auto parts and the like), AND to their customers for the purpose of buying their products. So the solution to the question: what to do about the banks? depends in large part upon the answer to the question: what to do about automobiles?

And the answer to that is: consolidation. It appears that in the world market and given locked-in cost considerations such as pension commitments, there is only room for one domestic US automobile manufacturer. The government may have a positive role to play (I seldom type those nine words): enter into negotiations and facilitate a merger of the three battered and torn-up US auto makers. They can, together, constitute ONE decent productive auto maker.

That one in turn will enliven the ancillary industries, and together they'll give the banks some one to whom to make loans again.