Some market participants are optimistic that the TARP plan to purchase troubled assets from banks will cure the credit crisis. Fair enough, but those who believe that this plan will result in banks marking up positions and writing up values on their balance sheets may be overly optimistic.
Some of these assets will never perform anywhere near as expected. At best, banks may not have to write down asset values further. How this plan affects banks depends on what assets they hold, what assets come 0n balance sheets in the future and at what price they can sell assets to via the TARP plan.
Either way, long-term rates will probably rise as we inflate our way out of this. Inflation will be tempered by slowing growth and consumption. Future lending will be done in a more judicious manner. We had all better be happy slower growth because the days of leverage are over. The economy will have to grow on fundamentals rather than leverage. Banks will be boring entities, but compared to what could have happened, boring is good.
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