When Government Does You a Favor

The best way to make someone like you is not to do them a favor, but ask for one. That is, ask a new acquaintance for some modest help with something. This makes them feel appreciated, useful, competent, and also, an equal at worst in the relationship. In contrast, accepting favors right off the bat presages a subservient relationship, one where you owe right from the start. Naturally, people prefer the former.

Another point to remember is that generally things that are free or have ridiculously low prices, have the greatest costs. TARP money was supposedly really cheap capital, but that's only if you ignore all the implicit conditions.

When the Treasury's Troubled Asset Relief Program (TARP) started, many banks were pressured to accept money because it would supposedly reassure the public, and if some demurred it might cause some banks to be afraid to take the money, which would then prevent the Treasury from saving the system. Basically, a coordination problem with signaling implied they all needed to take the money for it to work. There were also hints that if they did not take the money, some might infer they were 'too weak' to get it, sort of a vague disaster scenario that in October 08 was not crazy. So the banks accepted the money.

As it became clear that accepting money invited all sorts of oversight of compensation and other issues, the banks scrambled to pay it back. The Treasury now is sitting on these requests, basically, not allowing banks to return money.

This weekend, Obama stated he will make sure those banks who have taken money 'are held accountable'. Not coincidentally, the Obama administration plans to address credit card 'abuses', basically limiting the ability of banks to raise interest rates on credit cards (we know how problematic high lending rates have been in creating this crisis). The White House needs them to appear beholden to the government so their forthcoming slew of bank policy initiatives is easier to pass. On TV this weekend, Larry Summers makes the case:

We don’t want people to be paying back the government in ways that would put themselves right back in trouble, and leaving themselves with inadequate capital.

Of course, they have a 'big picture' pretext, and who's to say how much money is necessary for potential risk? One could rationalize any finite number. The bottom line is, they got their foot in the door and aren't about to pull it out. As Rahm Emanuel noted, 'never let a crisis go to waste'.