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Bailout Watchdogs Lamented that Bailouts Created Riskier Economic Environments |
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Wednesday, 03 March 2010 |
Neil Barofsky, special inspector general for TARP, filed his quarterly report with Congress that was published on Sunday. Therein, Mr. Barofsky warned that the economic crisis will continue to worsen. Mr. Barofsky believes that absent real reform in the financial sector, the benefits of the TARP programs will not prevent an even greater economic meltdown in the future. Financial institutions deemed “too big to fail” have received bail out monies, and yet have not discontinued the practices that resulted in their near collapse. These banks continue to grow in size and have not ceased the practice of awarding their top executives enormous bonuses and salaries. Mr. Barofsky blames the banks’ belief that the government will again provide a bail out if things go awry.
Mr. Barofsky and his team are involved in investigating many allegations of fraud on the part of financial institutions. He believes that the Treasury Department must enact stricter and clearer rules to provide a better framework for banks regarding conflicts of interest. Thus far, the Treasury Department is unwilling to do so, as it believes current rules are sufficient, and that those suggested by Mr. Barofsky would impede the success of the TARP program.
The report also warns of a possible new housing bubble. More than ninety percent of home mortgages are backed by federally-controlled mortgage programs, and the Federal Reserve has supplied one and a quarter trillion dollars to stabilize mortgage rates and allow more homeowners to refinance. This, he warns, could result in an artificial inflation of home prices. Once the Federal Reserve reduces the monies being injected into the housing sector, it is likely that the value of homes will significantly decline.
Although the Obama administration maintains that the program has stabilized the housing market, Mr. Barofsky urges a reformation of Fannie Mae and Freddie Mac to avoid another financial crisis.
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