TARP Cost $50 Billion?

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.

  1. #1 by Mike Lovell on October 5, 2010 - 13:54

    I’m always skeptical about reports like this. First, where did all the money go to, as in which players and where? Could the money have been directed more towards the ‘below top tier’ companies and individuals and taken care of more or not?

    As for it now only costing $50 billion, it seems to me that the figure is an adjusment made after the fact. Repaid loans, interest bearing on the accounts prior to ditribution, etc etc. I get all that. Now the big question in my mind is regarding the sudden cheapness and possible profits..does this take into account any interest required to be paid back on the newly printed/borrowed money?

    Now onto republican outrage…..If i remember correctly, a lot of those howlers now were voting for it before. Seems to be nothing more than a political bob and weave now. All the claims of the economy WOULD HAVE done this or that bad thing, had we not passed TARP is also something that gets caught in my craw a bit. It’s easy to say things would’ve happened, but how do we really know?

  2. #2 by Scott Erb on October 5, 2010 - 14:04

    We can never know alternate pasts, that’s a problem we in political science always have to deal with. If only we could build a time machine and, say, go back and kill Hitler in 1926…then we could see if he personally really was responsible for bringing another to Europe, or if it would have happened anyway.

    Yet I really believe that we were on the verge of a complete collapse — we can’t know for sure, but everything I’ve read suggests that the fear was palpable at all levels. Certainly the people involved believed things were going to collapse. Paulson was a known free-marketeer (as of course was Bush), and it irked him to have to be do this, but he saw no other choice. Yeah, it’s worth double checking the math and all, but frankly, even with the uncertainty and significant imperfections in a hastily written and passed bill, I’m glad the government was able to move in a bi-partisan effort with speed to prevent what could have been a crisis far worse than that we’re now enduring.

    Meanwhile, I’ll get back to work on my time machine and then we can go back and test the theory. (Hmmm, maybe an old box somewhere can be used…)

  3. #3 by bloodyfootandmouthdisease on October 6, 2010 - 08:24

  4. #4 by Mike Lovell on October 7, 2010 - 15:01

    Something else I was curious about. didn’t we pump out another huge multi-billion dollar program later on, that was about on par with the TARP bill? and if so, what of that? Did we use one to cancel out a lot of the other?

  5. #5 by Scott Erb on October 7, 2010 - 15:12

    That was the stimulus. Generally when you’re in a recession governments try to turn the economy around by stimulating it through increased spending. It usually works. The problem here is that we did so much deficit spending in boom years (when you should have a balanced budget or even keep a surplus) that the debt is so high that stimulus spending risks devaluing the currency and creating a debt crisis. Also, the stimulus will only work if it truly creates more economic activity — if it is just tax cuts or government transfers of wealth, it could go into consumption of foreign produced goods which would do no long term good but just increase debt. The stimulus was different than TARP. The problem I see now is that while banks are paying back TARP, they haven’t really altered their behavior. We could see another financial crisis emerge.

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