Should We Be Thanking the Government for the Bailouts?
Was the unpopular, much-maligned Troubled Asset Relief Program—better known as the bailout—a secret success? A Politico story by Ben Smith suggests it was, though few political leaders are willing to say so. TARP, he writes, has become a handy tool for attacking the Obama administration and "elites and insiders of all kinds." But it was actually constructed under Bush, and according to experts he talks to, "succeeded far beyond expectations." Its demonization has more to do with politicians' fear (and exploitation) of angry populist voters, suggests Smith, as well as its "conflat[ion] ... with the stimulus, a piece of policy whose supporters and foes have fallen into a much more familiar debate about the role of government and public spending." He notes that polls show the public "has only the haziest view of what TARP was."
Some finance and politics bloggers, however, strongly disagree with Smith on the legislation's merits. Meanwhile, a Congressional Oversight Panel report on TARP has criticized the Treasury department's "largely ineffective communication" of the reasoning behind the bailout.
'Put Simply, It's Not a Success' TARP's bad reputation is deserved, declares Marshall Auerback, analyst and hedge fund manager, posting at Naked Capitalism. "Virtually all of the goals of TARP could have been achieved via regulatory forbearance, rather than government bailouts," and for some reason nobody now "mention[s] the fact that the banks have basically been able to engage in perpetual backdoor bailouts via Fannie and Freddie." In addition, "Ben Smith seems to forget that Congress adopted unprincipled accounting principles that permit banks to lie about asset values in order to hide their massive losses on loans and investments, which allowed them to raise the capital." His conclusion:
Calling the TARP a success is like claiming your wastrel son is getting his life together because he's settled his gambling debts, while omitting that you are paying for his apartment, got him an overpaid job at your company, and are handing him $100 bills more than occasionally. Indeed, the only way to call TARP a winner is by defining government sanctioned financial fraud as the main metric of results.
More Holes in the Story Finance blogger Edward Harrison at Credit Writedowns points out that "TARP and the associated bailouts relied on hidden costs in the form of zero interest rates and a steep yield curve, borrowing for cheap rates against less than stellar collateral, and regulatory forbearance." He thinks the Politico story is a little too tinged with politics. Tim Cavanaugh at Reason agrees, writing that "some of the facts [in the story] are wrong: 'The banks at the center of TARP' have not 'paid the money back' unless Citi has stopped being a bank."
Success Isn't Just Absence of Disaster The American Spectator's Joseph Lawler doesn't appreciate Smith's argument that TARP saved the economy from disaster: "if the counterfactual really were the apocalyptic scenarios posited by Smith's sources--Alan Blinder and Mark Zandi reference 25 percent unemployment, and Smith himself invokes the image of 'breadlines and catfood'--then almost any measure taken to save the banks would have been a success, by their standards."
A Good Policy That Hasn't Become Good Politics Daniel Drezner of Tufts University, writing at Foreign Policy, seems to agree that TARP was a success, calling it "one whopper of an exception to [the] general rule" that "a policy [that] actually yields concerete and positive results ... should be perceived in a more favorable light." This is troubling, he adds: "Over the long run, good policy should translate into good politics."
Necessary, Poorly Managed, May Hurt Government Ability to Respond in the Future, decides the Congressional Oversight Panel in their report. The economists they consulted may have differed on many things, but they agreed on this much: TARP was both necessary and badly executed. The "capital injections," a.k.a. bailout-style strategy, "followed by the rollout of numerous seemingly unconnected programs, combined with largely ineffective communication of the reasoning behind these actions" confused people and "undermined trust in the TARP." In addition, a "significant moral hazard" issue was created by the government's failure to "impose ... stringent costs upon TARP recipients." The government saved the firms very nearly for free, essentially. Here's the troubling conclusion:
The program's unpopularity may mean that unless it can be convincingly demonstrated that the TARP was effective, the government will not authorize similar policy responses in the future. Thus, the greatest consequence of the TARP may be that the government has lost some of its ability to respond to financial crises in the future.
