Yes, TARP Was an Abomination
I'm seeing a flurry of articles proudly proclaiming that TARP was in fact a great success, given that the Congressional Budget Office has reduced the loss projections to to $66 billion. Why is the media ignoring this, asks NPR?
I'm ignoring it because this misses the point. (Or more precisely, I'm not ignoring it, I'm dismissing it.) First, the projections are based on the fantasy that the government will over the long-term get good returns on its stake in bailed-out companies. Look at the example of British Leyland and ask yourself how likely that is. Of course the automakers are doing well now: They just got a huge cash infusion from the government. I'd be doing great if the government had just given me that much money, too. It doesn't mean that in the long run I'd be producing products consumers want to buy at prices they want to pay.
Second, it ignores the huge opportunity cost of spending the money that way--that's money that could have been invested in productive sectors of the economy. (Imagine if that much money had been invested privately by individual citizens, not the government, in innovative small businesses.) Third, it once again taught the financial industry that it will be rewarded for insane risk-taking, incompetence and failure, making it that much more likely that the very same bozos will do it again.
Dean Baker makes these points clearly and well. His conclusion--that TARP caused the financial crisis--is too strong; there were quite a few idiotic policies involved. But he's basically right. It was an abomination.
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May '10
Re: Yes, TARP Was an Abomination
Your 2nd and 3rd points are the ones I tend to make against Keynesian fiscal policy. Government spending inexorably reduces private spending since the government must steal or plan on stealing from the private sector in order to spend. The problem with this scheme is that private spending is far more likely to be productive than government spending because the survival of private spenders is contingent upon the prudence of their spending and they bear the costs of their errors. The survival of government is, by contrast, not contingent upon the prudence of it spending, nor does it bear the costs of its errors. Hence, private spenders have a far greater incentive to spend intelligently. Your third objection is most commonly called the moral hazard problem.
Jul '10
Re: Yes, TARP Was an Abomination
GM stock would have to reach $133.78 per share before the U.S. taxpayer will receive full repayment of bailout money according to U.S. Treasury.
I expect my money in unmarked bills.
Sep '10
Re: Yes, TARP Was an Abomination
Also, don't forget, that even if the government gets "payed back" ti will be meaningless in terms of the debt and possibly even worse. If they get the money back, it will not be returned to the tax payers or applied to the debt. It will be spent on something else. Most likely a new boondoggle that further expands government and possibly will demand more financial input on the future. I would even suggest that your typical politician will take a report with rosy future projections and spend that projected money now. Abomination is right, and possibly not strong enough.
May '10
Re: Yes, TARP Was an Abomination
I would add the damage and danger done by a rogue government that ignores bankruptcy laws, intimidates creditors and gives a sweetheart deal to the unions. I no longer have in my portfolio bonds with heavily unionized companies & would love to see a study as to their borrowing costs over the 5 years after the debacle.
When the govt. begins to ignore the rule of law, bad stuff happens to investment confidence - and investment moves somewhere else. At least in developing countries there is dependable corruption and a higher rate of return to compensate. A friend of mine just purchased a rental house in Manila, paid for with liquidated US equities. I know many more doing similar things.
May '10
Re: Yes, TARP Was an Abomination
The notion that TARP was successful is driven by the narrow view that the government will get "paid back" and that the fiscal impact will be at least relatively minimal. An otherwise unconvincing NPR piece on the outgoing TARP administrator (http://n.pr/9jvLaj) went so far as to say that at least in the case of AIG, the gov't may even make a profit. This is all very much besides the point, and as an initial (albeit reluctant) supporter of the policy, I wish I could believe TARP's effect on the economy as a whole was beneficial, which is not to suggest that I think we have enough good data to declare it was a bad idea, either. The various critiques of the pro-TARP Blinder-Zandi study lead me to believe the state of economic modeling is so poor that it's hard to tell definitively one way or the other.
May '10
Re: Yes, TARP Was an Abomination
The idea that TARP was "successful" in the sense discussed here is merely political hype by Mr. Obama, and most of the criticisms rehearsed above are quite valid. The money should never have been tapped for GM or any other industrial concern and the program should have been killed after the first $350 billion and the returned money applied to the Treasury.
Nevertheless, the common conclusions you see in certain circles that TARP was a bad decision at the time are pure after-the-fact assertions. In September 2008 there were very good reasons for having the weapon available. The fact that the financial system did not implode may or may not have been related to the confidence engendered by the availability of TARP to rescue some critical balance sheets and prevent terminal runs on vulnerable financial institutions. The banks were not bailed out because we wanted to subsidize Wall Street bonuses, they were propped up because the overall systemic economic consequences would have been disastrous in an easily foreseeable scenario.
The original purpose of a focused TARP bears no resemblance to its conversion into the Obama WPA.