Arnold Kling  

The Political Economy of TARP

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Among the many faults of TARP, the most enduring is probably the way it discredited the concept of fiscal discipline. Now, all restraints on deficit spending have been lifted. For documentation of the huge rise in spending and deficits relative to GDP going forward, see Keith Hennessey, Philip Klein, and Hennessey again.

We were sold TARP and the stimulus as temporary measures to fight recession. But as the linked posts show, once the economy recovers, spending picks up again. Instead of TARP and the stimulus serving as temporary policies, they have been added to the spending baseline.

This is not a surprise. At some level, Bush and Paulson had to know that it was going to happen. And yet they pressed for it, anyway. If some day the U.S. faces hyperinflation because of its fiscal mess, so that people have to pay for bread with million-dollar bills, I think those bills should come with Paulson's picture on them.

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CATEGORIES: Fiscal Policy

COMMENTS (9 to date)
parco writes:

Something like this?

Jeff writes:

It will be a long time before fiscal discipline is restored. Having bailed out the richest and least deserving of their consitituents, bondholders of the big financial institutions, how can the Congress possibly say "No" to anyone else?

Yancey Ward writes:

Come on, Arnold, everyone knows heroin addicts find it easy to cut back on their use.

Greg Ransom writes:

I began calling Bush "the worst President ever" about 2005.

Bush deserves much more blame for the American disaster than he is getting -- mostly because he is protected by GOP partisan conservatives, who won't tell the truth about the "home" team.

Sarge writes:

This should not come as much of a suprise. I think it was Milton Friedman who said something to the effect of "There is nothing more permanent than a temporary government measure." (I am not at all certain about the exact phrasing or source, so feel free to correct me if I am mistaken. My feeling will not be hurt.)

On a similar vein, mohair subsidies are still alive and well. Once you give away goodies, you can't take them back. Rather, you could, but it would be political suicide.

On a side note, that bit about Paulson's picture of hyperinflated currency was a nice touch.

Sarge writes:

*On* hyperinflated currency.

Note to self, proofread next time.

Joey Donuts writes:

In order to compare various presidents and congressses deficit spendings look at this.

You think Bush was bad? Whew!

Tom Grey writes:

Bush's TARP was terrible to save the rich but too-careless bankers who invested/speculated on over-priced securitized housing assets.

He did it 'to save the (capitalist?) system'*.

The alternative would have been what?
Massive, massive, tax cut based deficits.

But the post-2001 drumbeat of Leftists against tax cuts (for the rich!) was not successfully fought by pro-market intellectuals and opinion makers. Tax cuts helped the economy.

The 2007 tax rebate in 2008 did, in fact, slow the decline -- indicating it was the right policy, but not enough for the emergency.

Too bad the GOP never seriously argued in favor of more massive tax cut based deficits.

All small-gov't folk must remember that, in any crisis, elected politicians must do something.
Tax cuts are the most effective anti-recession measures for the economy, and certainly for reducing the growth of gov't expenditures, relative to all other gov't actions.

*We needed to destroy it, in order to save it.

B.B. writes:

Take a look at the long-run budget outlook from CBO and GAO.

The federal government, under current policy, is insolvent because of:

(1) Social Security
(2) Medicare
(3) Medicaid
(4) Medicare prescription drug benefit.

(1) was created by FDR and a Democrat Congress. (2) and (3) were created by LBJ and a Democrat Congress. (4) was created by George Bush with some help from Congressional Democrats, who complained because it wasn't bigger. So most of the insolvency comes from Democrat policies. I haven't heard Obama saying he would repeal (4); he wants to make it bigger.

The Bush-Paulson TARP may have looked big, but as far as the banks are concerned, it has a net present value of about zero. TARP will lose money because of Detroit and maybe AIG, not from big banks. BTW, Congressional Republicans largely voted against TARP.

As for using TARP money on Detroit, lame-duck Bush used the money at Obama's request.

But we will never get our money back from Fannie and Freddie, both of which were created and supported and protected by Democrats. (That was not TARP money.) Obama still refuses to submit a plan for resolving Fannie and Freddie.

Obama gave us the ARRA fiscal 'stimulus.' It had no Republican votes. It was a feeding frenzy for Democrats.

If the federal government goes broke, I know who to blame.

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