The Troubled Asset Relief Program Term Paper Example | Topics and Well Written Essays - 1500 words

The Troubled Asset Relief Program - Term Paper Example The Need for Relief: Why T.A.R.P. was Created The housing market is generally cited as one of the biggest factors behind the financial crisis that resulted in the need for T.A.R.P. to be created. After a short recession in 2001, housing sales rose, peaking in September of 2005 before dropping by as much as 52% by November 2007 (DiMartino, and Duca 1). In 2001, to counteract a recession, the Federal Reserve proceeded by lowering the interest rate alongside the push from both the Clinton and the Bush administrations for the American public to buy houses (Gjerstad, and Vernon L. Smith). This resulted in the lowering of credit standards, which in turn granted a flood of events such as subprime mortgages, or the lending of money to people generally considered a credit risk, going from 9% in 2001 to 40% in 2006 (DiMartino, and Duca 2). By 2007, the housing market was deteriorating, and delinquency rates on subprime mortgages and the interest-only adjustable rate mortgages were soaring; the big businesses with investors in those subprime mortgages were going under quickly (DiMartino, and Duca 5). The Federal Reserve responded by cutting the interest rate aggressively, from 5.25% to 2%, but the crisis continued (Bernanke). By September 15, 2008, the Treasury Secretary was forced to pay a visit to the White House and tell then-President George W. Bush an awful truth: the financial market was imploding, and unless something was done quickly, the worst economic crisis since the Great Depression would result (Halm-Addo 1). Thus emergency measures were taken, and on October 3, 2008 the government was forced to step in and lend assistance, by means of creating the Troubled Asset Relief Program. The Purpose of The Troubled Asset Relief Program (T.A.R.P.) The purpose of the Troubled Asset Relief Program (T.A.R.P.) was, originally, quite simple. The Emergency Economic Stabilization Act created T.A.R.P. as well as giving the power to the United States Government to both buy and insure certain types of assets, mainly to protect the average taxpayer (â€Å"The Emergency Economic Stabilization Act of 2008†). Specifically, T.A.R.P. meant that the Secretary of the Treasury, with the backing and support of the Federal Government, could then purchase defaulted mortgages or other assets that were weighing on the balance sheets of the subprime lenders (â€Å"The Emergency Economic Stabilization Act of 2008†). At the time of being enacted into law on October 3, 2008, no lending between banks was taking place, and in turn, no lending to the consumer was taking place (Massad 1). No lending to consumers meant that no money was flowing into the economy of the country, thus creating a nightmare for all businesses and consumers. Allowing the Federal Government to purchase the debt in exchange for repayment terms would wipe the bad debt from the balance sheets of the banks and allow them to begin functioning once more. T.A.R.P. created several programs which were able to kick-start the American economy. Money was invested in banks through several programs, including one known as the Capital Purchase Program (CPP), which aided banks across the nation (United States Department of Treasury). Through the Capital Purchase Program, the United States Treasury, working with the Federal Reserve and other