Trouble with TARP

For that reason, Siegel said, the initial phase of the Bush administration's Troubled Asset Relief Program (TARP) was seriously flawed. Paulson's Treasury Department decided to buy equity stakes in troubled banks, assuming they would make more loans with more capital on hand. The amount of capital, though, has little to do with the reluctance of banks to make loans, even as the rate on federal funds is slashed to near zero. John Maynard Keynes, the British economist, called this situation a "liquidity trap," Siegel noted. "The big failure of TARP was that it misunderstood why banks weren't lending. Officials thought it was because they didn't have enough capital. In reality, they were worried about the solvency of all the borrowing that was out there." Siegel suggested that the government rescue plan could be improved with guarantees that recipients demonstrate they are using the federal dollars to extend credit.

According to Siegel, monetary policy has failed to stimulate the U.S. economy. The U.S. faces a situation similar to what happened in Japan during the 1990s when interest rates of zero could not revive the country's moribund financial markets. The only viable solution now open to American policy makers is Keynesian fiscal policy, a stimulus program that lowers taxes or increases government spending or both. Indeed, this is exactly the type of program -- costing at least $825 billion -- that the Obama administration and Senate Democrats are considering. Siegel said that policymakers should not worry about the impact on deficits; it is large, he added, but not dangerously so.

Towards the end of his 90-minute talk, Siegel offered some tongue-in-cheek advice to would-be entrepreneurs. "Start a new bank," he said. "You won't have the problems of existing banks, and the federal loans interest rate is near zero.  Demand for loans is high, and you will face no competition from the private market. You could become very profitable."