It may not help the Democrats during the 2010 election cycle, but in the long run the Toxic Asset Relief Program so vilified by Republicans and pundits may turn out to not only be cheap (and could even earn money for the government), but be remembered as the program that rescued the American economy when there was a severe risk of global depression.
I’m not convinced that we’ll avoid “Great Depression 2.” I’m still of the opinion we’re in it, though perhaps with thoughtful policy it can be ended without lasting the length and causing the amount of suffering brought on by the first Great Depression. Of course, the consistent economic growth pulling the US out of the depression from 1933 to 1937 led President Roosevelt to abandon his policies and work to try to balance the budget — that brought the depression back in 1938. But with economic numbers starting to improve, and the news about the fact that TARP did not blow a huge hole in the deficit after all, this oft maligned government program may end up being seen as one of the most enlightened acts of the Bush Administration.
It’s easy now to forget the panic that set in after the collapse of Lehman brothers. Insiders were convinced that we stood at the precipice of a major economic collapse which could stall the economy completely if something were not done. Major corporations were at risk, and there was even talk about McDonald’s being unable to make payroll. The fear that we were about to fall to 30% unemployment and major bank failures nation wide was real. Those events were very possible in September 2008.
Yet from the start the efforts of Treasury Secretary Paulson and President Bush to find a way to prevent economic meltdown were fraught with politics. While they feared the worst, mainstream citizens and even many politicians did not see the threat. Following an ideological mantra of “let the market handle it,” they didn’t understand that in this interconnected global economy it wasn’t just “letting bad banks fail,” but accepting a systemic failure that would wreck havoc on both those actors who made bad choices, and innocent businesses caught up in the maelstrom. Simplistic ideological slogans make bad policy, after all.
John McCain originally sought to suspend the campaign to deal with the crisis, and headed back to Washington where he found himself paralyzed by politics. He supported the measure, but his party was showing skepticism. His weak performance in that affair helped galvanize support for Obama who in this stood behind the unpopular President Bush.
As the economy continued to sputter through 2009 and 2010, TARP has become something everyone loves to hate. $700 billion to bankers! They’re posting profits — they didn’t need it! The markets were circumvented, TARP is running up the deficit, it was unnecessary and wasteful. McCain even lamely claimed that he was lied to about what the bill did when a primary challengers attacked him for voting yes.
But sometimes the short term view is wrong. Now that TARP looks ready to be not only cheap, but ultimately will post a profit, it’s clearly NOT the horrific waste of money people made it out to be. Moreover, criticism that it rewarded bankers or failed to reform the system is misguided. At that point speed was of the essence, if not done in time the downward spiral could have gone out of control. All they could do is gird up the system as it was, flaws and all. Once the system stabilized and we were out of danger of economic collapse, then time could be spent talking about reform. At that point, liquidity was needed.
A lot of economics is driven by psychology. The fact that a massive influx of capital showed the capacity of the US government to reinforce the system at a time of weakness helped give banks, investors, foreign markets, and US businesses the confidence that while a recession was inevitable, there was no need to panic. The system would still buckle; the Dow fell over 40% at one point, and without the subsequent stimulus package we’d still have risked seeing unemployment over 20%. Collapse, however, was averted.
President Bush had a difficult Presidency. Misjudgments on Iraq, massive deficit spending during an economic boom, and other mistakes hurt the US on many levels. Yet when faced with this most dangerous crisis to his the US in recent history – far more dangerous to the national interest than the attacks of 9-11 — he did what was necessary and pulled the US economy from the abyss.
It’ll take awhile for the pundits to abandon their vilification or TARP and get the $700 billion sum out of their heads. The anti-TARP narrative is pretty entrenched. But over time the reality of the heroic effort to save the global economy from the danger of a disastrous collapse will be appreciated and recognized.