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What Obama Said Last Night That Really Was Controversial [UPDATED]

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So, while everyone was losing their minds at President Barack Obama's ill-advised "Special Olympics" quip, here's an interesting part of the interview that seems to have gone unremarked upon, by and large:

LENO: Well, when will the money -- this money was given out to the banks. I would have thought by this time it would have sort of trickled down to Main Street, to people wanting to get loans -- I mean, it all went out there months and months ago. Where is it?

OBAMA: Well, what's happening is a lot of these banks are keeping it in the bank because their balance sheets had gotten so bad that they decided, you know what, for us to stay solvent we need to maintain certain capital ratios; we've got to have a certain amount of capital in the bank -- and they haven't started lending it yet. And that's why what we've got to do -- right now what we're doing is essentially doing a diagnostic test -- trying to use some auto language here so you -- (laughter) -- we're doing a diagnostic on each of the banks, figuring out what are their capital levels? Can they sustain lending? And then I think we're going to separate out -- those banks that are in good shape, we're going to say to them, all right, you're on your own; go start lending again. Those banks that still have problems, we'll do a little more intervention to try to clean some of those toxic assets off their books.

But I actually have confidence that we'll get that done. In the meantime, we're taking a lot of steps to, for example, opening up -- open up separate credit lines outside of banks for small businesses so that they can get credit -- because there are a lot of small businesses out here who are just barely hanging on. Their credit lines are starting to be cut. We're trying to set up a securitized market for student loans and auto loans outside of the banking system. So there are other ways of getting credit flowing again.

So let me get this straight. We have here broad acknowledgment that the first bank intervention didn't work because the banks used the money to bolster their capital ratios instead of lending the money out, which was the whole point of the intervention in the first place. Additionally, we have Obama talking about the need to "set up a securitized market... outside of the banking system" in order to "get credit flowing again," and establish the very lending that the bank intervention was supposed to have achieved. Isn't this an indictment, plain and simple, of TARP? And yet, after these "diagnostic tests," we may yet end up doing "a little more" TARP-style "intervention?"

This looks to me like we'll be pursuing both an admittedly unsuccessful policy AND a stopgap policy to mitigate the former policy's lack of success, simultaneously.

[UPDATE}

As many have pointed out, I go too far, perhaps, in calling this a "plain and simple" indictment of TARP. So. okay. Noted. Nevertheless, it is a moment that calls for a greater clarity of terms. It's not for nothing that Leno asks: "...this money was given out to the banks. I would have thought by this time it would have sort of trickled down to Main Street, to people wanting to get loans -- I mean, it all went out there months and months ago. Where is it?" He asks this because TARP was sold as a means to get lenders lending again. Clearly, it should have been sold as a means to achieve bank capitalization.

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