Arnold Kling  

Dominating the Narrative

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Will Wilkinson writes,


Ygesias says, "I believe that absent the [TARP] bailout, we'd be looking at even higher unemployment today."

I think this is a plausible claim. But I don't know of a satisfactory way to evaluate it. It's plausible because some plausible theories about the nature of the financial economy and its interaction with the real economy imply its truth. But other plausible theories do not. My problem is that I don't know of a satisfactory way to evaluate these theories. I'm not saying that there is no way to evaluate them, only that I don't know what it is. It would be nice to form a responsible opinion about this sort of thing. Can someone please help?

One of my strongest beliefs about the financial crisis is that the narrative that we come to accept about it will matter much more than the crisis itself. I see a strong parallel between the narrative "TARP prevented a Great Depression" with the narrative "The New Deal ended the Great Depression." The latter narrative has very little economic support, even among economists who avidly support the New Deal. However, it is the dominant narrative because it supports progressive ideology.

The claim that the economy would be much worse off now without TARP has been repeated so many times that I must infer that it has as much ideological significance as the claim that the New Deal ended the Great Depression. And yet, the claim is rarely backed by evidence.

Some further comments.

1. I will certainly respect you in the morning if you say that we cannot possibly know what would have happened without TARP, because history does not provide us the opportunity to run controlled experiments. But I think that one must try to make intelligent guesses, even though we can not know with high confidence.

2. Textbook macroeconomics would tell you that we did not need TARP. Textbook macroeconomics says that fiscal and monetary policy can deal with a recession. If jobs programs are a third-best policy for dealing with unemployment, then bank bailouts are no more than a fourth-best policy.

3. Ben Bernanke studied the Great Depression, and he found that the loss of banking institutions mattered, because borrower-lender relationship capital was destroyed. But even if we stipulate that his view was correct for the 1930's, it was not necessarily correct for today's economy. What we had last year was not a crisis in ordinary banking, but a crisis in securitization. In my opinion, we can do without securitization. Instead, in my view we can, and probably should, return to ordinary banking.

4. WIthout TARP, policymakers could have focused on the parts of finance that do not relate to securitization. Providing a temporary guarantee for money market fund deposits was probably a good idea. It was probably a good idea to make sure that the commercial paper market kept functioning for ordinary businesses--but not for funding structured investment vehicles filled with mortgage securities.

My view of history is that what TARP accomplished is that it saved the firms that were involved in securitization. If you think that the institutional capital embedded in that industry is really, really valuable, then TARP had benefits that might offset its costs. My own view, having seen first hand how securitization worked when I was at Freddie Mac, is that it relies too much on government guarantees, and old-fashioned banking is a viable alternative. So I would not have been willing to put much effort into saving securitization.

Furthermore, I think that saving securitization produced no short-term benefits for dealing with the recession. If anything, it diverted tax resources from other uses that could have done more to maintain full employment.


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COMMENTS (12 to date)
wm13 writes:

I have a different reading on securitization. FNMA and FHLMC securitization relies on government guaranties, but it isn't clear to me that other securitization does.

What TARP did is not to bail out securitization vehicles--the REMICs are where they are--but to bail out intermediaries in the securitization business who held too much inventory. Unfortunately, the various reform proposals floating around seem dedicated to keeping more assets on bank balance sheets. Additionally, some banks were in trouble because of their use of SIVs, which are basically a way to finance long-term assets with short-term debt. However, the SIVs would have been in just as much trouble if they had owned whole loans as they were owning MBS.

The TARP money was also used to bail out lots of smaller banks that hold too much in commercial real estate loans, plus the auto companies. This has nothing to do with securitization, and the auto company part has nothing to do with Bernanke's analysis of the Great Depression.

Steven writes:

"Little economic support" for the notion that the New Deal ended the Great Depression? I suppose it comes down to quibbles over definitions. There's lots of evidence that FDR's decision to get off the gold standard and devalue the dollar was the major factor ending the downturn of 1929-1933. There's not much evidence that anything else FDR did helped. Your can avoid giving credit to the New Deal by (1) not counting the devaluation as part of the New Deal or (2) focusing on both the 1929-1933 and 1937-1938 downturns, rather than just the first part of the Great Depression.

Trevor H writes:

I would add that whatever benefits can be ascribed to the functioning of TARP must be balanced against the costs to the economy of passing TARP. Paulson & Bernanke stepping up to the national microphone and essentially saying to the country, "Now is the time to panic" contributed materially to the depth of the recession, at least in the narrative running through my head.

Marty writes:

I tend to agree with Trevor H.

Also, why should anyone care what Matt Yglesias, of all people, has to say on the subject?

Beyond that, this (world without TARP) is an unknowable counterfactual. The argument that but for TARP we were all doomed seems to me to depend in part on the idea that but for TARP we would have done nothing and just watched everything fall apart. There was an almost infinite range of other possibilities, most of which were never even thought of because TARP pre-empted those lines of the future.

Part of this may be evidenced that TARP wasn't even TARP---it was originally supposed to buy bad loans into a bad bank, thereby turning bad banks like Citi into good ones; then it was changed into capital infusions and such things as the GM bailout in December, 2008, things that were specifically NOT on the table when TARP passed.

In my opinion, the idea that all debt holders and counterparties have to be 100% protected as if they were FDIC-insured will in the end be unsupportable and unaffordable, and the best one can say about TARP and most of what has happened since is that we've kicked that can down the road a few years more or less. In theory, we could make use of that time, but with people like Bernanke and Geithner and Frank and Dodd in charge, we won't.

R. Richard Schweitzer writes:

A great value of the TARP events is largely overlooked.

That value is political, in the broad sense of that term.

What those actions have done is to focus the attention of more of the electorate on how the instrumentalities of government can be deployed, the risks involved in the powers of deployments, the potential for inequities (and iniquities)in uses of those instrumentalities; and raisng a sense that limits are indeed required.

Les writes:

It seems to me that claims presented without supporting factual evidence are not worth making or considering.

R. Richard Schweitzer writes:

A great value of the TARP events is largely overlooked.

That value is political, in the broad sense of that term.

What those actions have done is to focus the attention of more of the electorate on how the instrumentalities of government can be deployed, the risks involved in the powers of deployments, the potential for inequities (and iniquities)in uses of those instrumentalities; and raisng a sense that limits are indeed required.

fundamentalist writes:

Quite a few people have regressed gdp on state spending to prove that it speeds up recovery. However, those are guilty of misspecification because history demonstrates that the economy has a natural ability to recover without any state stimuli and that variable is always missing. Trying to find evidence for the efficacy of TARP encounters a similar problem.

fundamentalist writes:

The Adam Smith institute has an interesting take on the latest crisis at www.adamsmith.org/blog/. Here are excerpts:

“Imagine that the problem was not a shortage of loans, but of food, caused by a deadly bug that had contaminated every grain of soil. Only one strain of produce that was immune: wheat. There was one food we could still eat: bread….
“Virtual computer generated wheat was treated as if it were real. It was kept in a virtual cold store and the policy was given a fancy name – “Quantitative Freezing”.
“Incredibly this policy boosted morale for a year or so and was presented as working.
“The emperor’s true nakedness was exposed as the bodies piled up.”

Matt writes:

Arnold writes, "Textbook macroeconomics would tell you that we did not need TARP. Textbook macroeconomics says that fiscal and monetary policy can deal with a recession. If jobs programs are a third-best policy for dealing with unemployment, then bank bailouts are no more than a fourth-best policy."

This is why I love micro. TARP makes me wonder whether macro textbooks should include a copy of the Constitution. Great post, Arnold.

MikeM writes:

"Also, why should anyone care what Matt Yglesias, of all people, has to say on the subject?"

Because, regardless of the existence of disagreement, it's valuable to look at the opinions of educated, intelligent people regardless of their political affiliation. Even if they're wrong, the process by which one actual arrives at the conclusion of incorrectness (rather than merely dismissing the post out of hand)is a valuable exercise in logical thought.

I suspect it'll be a long, long time before we know exactly whether or not TARP net helped our hindered us. It's been eighty years since the Great Depression and there's STILL disagreement there, although we're a lot closer to a conclusion today than we were in 1936.

wm13 writes:

"it's valuable to look at the opinions of educated, intelligent people regardless of their political affiliation."

I believe the question is whether it's worth considering the opinions of 20-somethings with no relevant employment experience and no relevant academic credentials or coursework. I never read Yglesias, because if I want to hear uninformed recent Ivy League graduates spouting off, I can sit at the young people's table at the next family reunion.

(The adults' table, of course, will feature grumpy old Ivy League grads.)

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