The Chairman of the US Federal Reserve, Ben Bernanke last week declared rather cautiously that the recession is over! If so, should federal bank bailouts continue?

In spite of the signs of recovery, the US Treasury Department has not ended its billion dollar bailout plan to financial firms. About $75 million was recently released under the Troubled Asset Relief Program (TARP) to five banks. Within the last three months, about $5 billion has been spent. Majority of the beneficiaries of the fund have been small banks.

Many financial experts now believe the financial crisis is basically over. It is in this light that some have begun questioning the rationale behind Treasury continuous financial-assistance program to banks.

Is Bank bailout a bad idea?

A number of analyst have criticized the government’s continued assistance to the financial sector since there are clear signs that many banks are improving, citing recent increases in salaries of top executives of some big bankers as proof of this.

It is also argued that some smaller banks have been able to raise significant amounts of funds in stocks without the support of government. Indeed, some banks have been able to pay back the credit they received from government including interest.

In addition, many of the banks have started making profit – increasing their interest earnings by 20 percent in the second quarter of this year. Hence, many analysts wonder why early in the third quarter government still sent to the banks $50.2 million in TARP funds. In their opinion, the banks that received the TARP funds did not need it. They would prefer rather that TARP funds is used to assist struggling banks and not the ones that are failing.

Bailout still a good idea

Some however, view the sustained bailout as a good decision by the government. The decision has been encouraged by the Senate majority leader Harry Reid, who has advised the Treasury to give the TARP funds to more small banks, even those that might fail without government assistance. Such a move he believes could make a huge impact on the banks, their customers and their communities.

Also, the TARP assistance will make a difference in ensuring that the current recovery process is not only sustained but leads to real growth in the economy to avoid another crisis as has been forecasted by some.

Again, with fluid liquidity, banks can comfortably increase lending – to the mutual benefit of small businesses and the banks. Obviously, the government also stands to benefit from its investment when the banks do well. The ordinary tax payer as well as small business will benefit.

TARP will stay longer

It is also important to keep TARP going to encourage stronger banks to buy up failing ones which continue to put the economy under stress.

The Treasury has explained that the TARP funds were never intended to be used to bailout only failing banks. One of the conditions for receiving funds under the TARP’s Capital Purchase Program, in which the government invested in banks in return for favorite shares, is proof that a bank could survive on its own.

Though the Treasury is ending some of its assistance programs to the financial sector, it plans to continue with the TARP program a much longer. There are requests coming in from banks for the TARP funds – perhaps a sign that the funds are still useful. The deadline for application for TARP funds is November 21.

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