The federal bailout of the nation's financial system is failing to address fundamental problems in that sector. That failure could produce an even greater financial collapse in the near future.
So says a disturbing report from the Special Inspector General for the Troubled Asset Relief Program, the federal watchdog for the $700 billion "bank bailout."
The unusually blunt report confirms what many Americans have suspected — that the federal government, beginning in the Bush administration and continuing under President Obama, is throwing buckets of money at the nation's financial crisis while doing little to change the behavior that created it.
The inspector general's report said that TARP has achieved some of its goals, such as stabilizing credit markets and rescuing large institutions from the brink of collapse. Many of the big banks that took TARP money have repaid it in full.
But other goals have not been met. Lending to small businesses and consumers continues to decline. Home foreclosures remain at record levels and unemployment is the highest it has been in a generation.
But it is the failure to address structural problems in the economy that is the most troubling. The report notes that:
The "too big to fail" institutions that precipitated the crisis are now even bigger.
Incentives toward reckless risk-taking remain as these institutions believe more strongly than ever the government will bail them out if they get in trouble.
There has been no change in the Wall Street culture that uses risky behavior to justify paying large bonuses. Businesses appear to be rushing to pay off their TARP obligations to get out from under the program's pay restrictions.
The federal government has effectively taken over the housing market by guaranteeing virtually all residential mortgages. Taxpayers now bear the risks once borne by private investors. The government is attempting to boost home prices, risking reinflation of the housing bubble.
"Stated another way, even if TARP saved our financial system from driving off a cliff back in 2008, absent meaningful reform, we are still driving on the same winding mountain road, but this time in a faster car," the report says.
The result could be an even greater financial collapse in as little as two years, the report says.
The special inspector general's report illustrates that what is lacking here is not money but political backbone.
The answer is not simply more regulation. The report makes clear that excessive government regulation of the mortgage market has placed all of the risks on the backs of taxpayers.
Members of Congress and the Obama administration must make the difficult decisions needed to place our financial sector once again on a rational footing in which investors not only reap the rewards but bear the risks of their ventures.
