Arnold Kling  

More Praise for TARP

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Trade War: Boudreaux's Case fo... David Ignatius, Court Reporter...

David Ignatius writes that the bailouts


almost surely saved the country from another Great Depression.

You might expect that the rest of the essay would explain why we should believe this. Instead, he goes on to ask,

What accounts for the public rage toward Washington?

The essay mostly is a valentine to Steven Rattner, who was the czar in charge of the auto bailout.

Rattner cautions: "If the task force had not been able to operate under the aegis of TARP, we would have been subject to endless congressional posturing, deliberating, bickering and micromanagement, in the midst of which one or more of the troubled companies under our care would have gone bankrupt."

In other words, we should be thankful that we gave this individual unchecked power.

The TARP was passed over public opposition. It was presented as a plan to buy toxic mortgage assets, not as a plan to bail out the auto companies. From a political standpoint, I think it is fair to describe the bailouts as a bloodless coup conducted by elites against the traditions of democratic government. I think that accounts for the rage against Washington.

I believe that the assertion that the bailouts prevented another Great Depression is false. My best guess is that the unemployment rate would be about where it is today with or without the bailouts. However, I deliberately choose the word "guess." Ignatius instead uses the phrase "almost surely." Do not confuse his stronger rhetoric with having more evidence or better judgment.


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COMMENTS (8 to date)
Rebecca Burlingame writes:

re Rattner: "...we would have been subject to endless congressional posturing, deliberating, bickering and micromanagement"

yeah like we avoided that

Richard A. writes:

One could make the case that the Fed's preoccupation with MBSs caused them to be less concerned for the overall economy. Had the Fed maintained a 5% growth rate in nominal GDP nominal interest rates would have been higher possibly making MBSs less valuable.

I think the bailouts are a good example on why it is so important to get monetary policy at the Fed right. When the Fed screws up you can expect the government to make the screw up even bigger.

Ted writes:

We can have a legitimate debate about TARP "saving" us from the Great Depression. Everyone agrees maintaining successful financial intermediation and credit allocation is vitally important for an economy. The bank failures in the Great Depression were disasterous. Not only because they reduce the money multiplier, but also because they impeded successful credit allocation which produced a much slower recovery than it otherwise would have been. A massive wave of disorderly bankruptcies would likely have been bad, but whether TARP was nessecary or the best option to secure a relatively stable financial sector is a whole other debate. I still think "lender of last resort"-type functions coupled with some things like expanded Commerical Paper Funding Facility would have allowed enough financial intermediation to go through while letting some of these guys go under. Also, the Fed keeping nominal income expectations at a reasonable level was really far more important than TARP in avoiding a Great Depression, but the merits of TARP are legitimately debatable.

What is not debatable is whether we needed to save the auto industry. The auto industry performs no special function, unlike financial intermediation, so I guess you might save a few jobs - but it wasn't nessecary to avoid disaster.

Gary Rogers writes:

My real anger comes when I think that these elitists, with whom I do not agree, expect my children and grandchildren to pay the bill. Their stupidity may well have condemned our future generations to third world status. And, for what? If we are going to have a melt down, let's have it now and we will do the suffering. To throw this debt on future generations is the worst kind of reprehensibility.

Norman Pfyster writes:

You've been saying since the beginning that the proponents of TARP have no proof that TARP prevented a meltdown. I will point out that you even less so have any proof of your belief that TARP was irrelevant. Both are arguments about counterfactual states of existence.

Pitchfork writes:

Norman,

Your point might be true if we stay at this level of abstraction (although you would have to say "no more so" rather than "less so").

However, if you look at what actions were in fact taken during the crisis period and what effects they can reasonably be understood to have had, you can begin to eliminate certain claims being made for TARP itself in terms of preventing further economic disaster. In particular, if you look at data on the credit markets, whether it's commercial paper or inter-bank lending, TARP seems to have had no effect whatsoever. Nor is there a good explanation for how TARP would have helped these markets in any case. Moreover, there were other programs in place that likely did have an effect (like the CPFF and the massive increase in TAF). You could also look at the Treasury's guarantee of MMF's, which went into effect on Sept. 19 -- a couple of weeks before Paulson "invested" taxpayer money in the largest banks.

The case, I would say (I wrote about it here), is pretty clear that TARP had little effect on financial stability. I would even argue that the whole run-up to TARP likely caused more panic than would otherwise have occurred. Having Paulson and Bernanke running around like a couple of Cassandra's saying the world would end if we didn't pass TARP did wonders for instilling confidence.

But the real effect of TARP, besides the political backlash, was to entangle taxpayer funds with the fate of the TBTF banks to the extent that even as late as 2009 the government had no plans to restructure or resolve zombie banks like Citi or B of A. The evidence, if you care to look at it beyond the level of the abstract, is clearly on the side of TARP's critics.

zefreak writes:

Norman,

If Obama hadn't won the 2008 election, McCain would be president.

If Obama hadn't won the 2008 election, Marvin the Martian would be president.

Counterfactual claims do not necessarily take up equal probability space.

rhhardin writes:

My impression at the time and now is that TARP prevented a run on the bank that the legal system could not have untangled for years, as to who's insolvent and who's just having cash flow problems.

Basically it avoided a legal system breakdown that would have tied up capital for years.

Everything beyond standing behind short term capital markets was and is mission creep, and ,particularly stiffing GM and Chrysler bondholders, which did permanent damage to the US.

Who will invest here if laws don't work.

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