There is no question that passing the TARP was the right thing to do. In some countries, the government has the authority to provide fiscal resources directly to the banking system on a huge scale, but in the United States this requires congressional approval. In other countries, foreign loans can be used to bridge any shortfall in domestic financing for the banking system, but the U.S. is too large to ever contemplate borrowing from the IMF or anyone else.
I watched over the Internet some of the hearing at which Johnson and others spoke. At one point, several speakers pointed out that in trying to suggest an alternate history without TARP, one has to assume some alternative. This leads me to think about the policies that have been followed and my proposed alternatives. These are alternatives that I proposed at the time.
1. Existing Mortgages and home owners.
Actual policy: attempts to implement loan modification programs
My policy: pay the moving expenses of homeowners who default on their mortgages. But do not interfere with the foreclosure process.
2. Mortgage Markets
Actual policy: keep Freddie Mac and Fannie Mae going, and we now have 90 percent of mortgage loans made by federal agencies.
My policy: Limit Freddie Mac and Fannie Mae to their existing oook of mortgage loans (I wrote this in September of 2008) and not allow them to purchase any new mortgages. Let banks take up the slack in mortgage lending.
Actual policy: creditors bailed out 100 percent.
My policy: Send in a "stern sheriff" to protect the liquid assets of AIG from creditors making "collateral calls." I was thinking of a government-suggested mediator, perhaps a former bankruptcy judge. If the parties did not like it, they could go to court. But my guess is that the parties would have preferred a mediated solution.
4. Big banks
Actual policy: bailouts of nearly all of them
My policy: Triage. Shut down the ones that have clearly failed, using FDIC procedures. Those that are clearly solvent should be allowed to proceed. Those that are neither clearly failed nor clearly solvent should be given forbearance, but with tight supervision to ensure that they do not use this forebearance to expand their risk-taking. Again, this was what I advocated in September of 2008.
Overall, the goals of actual policy were to try to achieve a much less painless outcome than what my policies were intended to achieve. In terms of goals, my policies were inferior in that sense.
But what about results? I am struck by the fact that even though banks seem to be doing well, taxpayer losses are going to be high and the recession has been quite severe. From the standpoint of the typical American, the results of the financial rescue policies represent what to me seems like a pretty low bar. Surely, alternative policies could have done better for the average American. I think mine would have.