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The Spectacle Blog
On Monday the CBO announced that TARP is projected to cost less than previously thought, in budgetary terms. Worryingly, this announcement led some influential commentators to write things like “TARP may end up going down as one of the most successful policy initiatives in American history,” as Jonathan Chait did, or “[t]here’s an increasingly strong case that TARP may have been the most cost-effective economic policy ever passed,” as Ezra Klein did.
These statements illustrate the extent to which partisanship and clever framing can influence the debate. It’s unreasonable for anyone who’s followed the issue to reach the conclusions that Klein and Chait, among many others, have. But the Obama administration has successfully framed the discussion of TARP to focus on the cost of the program to the budget.
Of course, that is not at all the proper way to think about the cost/benefit analysis of TARP, nor the way that most people would naturally consider the program. Ryan Avent has provided a good, succinct explanation of one of the many dangers of limiting the discussion to the budgetary costs of the program:
Take a company that’s widely believed to be on the brink of failure, throw the weight of the government behind it, strip it of a bunch of liabilities, and suddenly you’ve increased the value of your shares. There’s no magic here.
What’s important to realise is that built into the rise in value of the companies backed by the government (the banks especially) is the government’s guarantee against failure. The government hasn’t yet withdrawn this guarantee, and so it’s still on the hook. President Obama could go before the country and say, “Ok, having sold our shares we now promise to never again bail out troubled companies”. Markets would go “Ha ha ha”, and continue behaving as if the government was still on the hook. Because it is.
And the American public seems not to have fallen for the administration’s spin: TARP remains extremely unpopular, and people were less likely to vote for a candidate who supported the bailouts.
It was probably necessary for the government to bail out certain too-big-too-fail institutions during the financial crisis. But there was no reason for the bailouts to entail the trampling of the rule of law, favoritism for connected banks, light-as-a-feather penalties, and all the other abuses that happened under TARP. That some people cannot understand this simple concept is a real cause for concern for when the next financial crisis comes around.
View all comments (12) | Leave a comment
More Blog Posts by Joseph Lawler
http://spectator.org/blog/2010/12/01/framed
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C Bowen| 12.1.10 @ 6:17PM
"It was probably necessary for the government to bail out certain too-big-too-fail institutions during the financial crisis."
Excuse me?
CalMark| 12.1.10 @ 6:30PM
What C Bowen said.
How can any alleged "conservative" writing for a conservative website say such an economically ignorant thing?
Sean| 12.1.10 @ 6:32PM
When the government interferes someone is losing out. What happens to those that short the stocks? What happens to those wanting to buy a house and all they can get is one still inflated in price? What happens to moral hazard when profits are privatized but losses are socialized? What happens to banks in good financial health that could have picked up new customers?
C Bowen| 12.1.10 @ 7:06PM
For another angle, Sean, what if those who held mortgage notes needed to raise cash without the government as a backstop?
As recently as the '80s they sent letters that offered good terms on principal payments--say for $10K, we'll knock off $16K in principal, and for $30K, we'll knock off $65.
One idea to raise cash--and morally speaking, more honorable then raising the capital via the point of a gun.
aware| 12.2.10 @ 6:14AM
"But there was no reason for the bailouts to entail the trampling of the rule of law, favoritism for connected banks, light-as-a-feather penalties, and all the other abuses that happened under TARP."
Yeah sure, but if it hadn't contained these things there would not have even been a "TARP". What do you think crony capitalism is exactly? Bailouts are the epitome of "trampling the rule of law".
Supply- siders are economic dunces who pretend to be freemarket supporters, but as the final paragraph shows, end up pushing the rope at both ends.
So everything would be just fine with State controlled economies with a few minor adjustments. Central planning is good if you have the right central planners, right? A rigged game is a rigged game no matter who the players are.
The weakest part of AmSpec is in the economics dept.
Curly Smith| 12.2.10 @ 8:26AM
The financial collapse is rooted in mortgages "backed by the full faith and credit of the United States". Bad public policy required lenders to lend money to those who truly lacked the resources to repay the loan. The lenders certainly took advantage of the law but most loans were guaranteed by Fannie Mae and Freddie Mac.
Now the pols could have come clean and admitted their role in causing the mess, like they bravely stepped forward in the aftermath of 9/11, or they could use taxpayer money to cover-up the bad legislation. Think of TARP as "hush money" and you'll understand why the politicians were so eager to pass it. If the pols hadn't bailed-out certain institutions then those institutions would have spilled the beans. All of the fraud, the inside trading, the double-dealing, the lying and deceit would have been in the open.
Yeah, just like 9/11, it's was some other dude. The policy makers had no role in making the policy. They're not accountable. And, you know what? They're responsible but the taxpayer is accountable. The pols profited from bad policy and they profited from the taxpayer bail-out of the bad policy.
jrs| 12.2.10 @ 9:17AM
This is a little incorrect although the follows the conservative party line that it was all Barney Frank and CRA, etc.... Did the easing of lending standards result in excess, risky mortgages. No doubt. This of course helped fuel housing prices and is a large part of the bust and of course taxpayers are on the hook big time for Fannie, Freddie, etc.... Here's where the problem with your analysis. The fannie and freddie bonds are guaranteed, so there was no problem for the banks. The problem was with all the unguaranteed loans (subprime, alt-a, helocs, option arms, etc...) and related financial products (mortgage abs, cdo's of mortgages, etc...). All the banks held massive positions in these and their derivatives. Why??? Not because of Barney Frank. They weren't lending to comply w/ CRA. They were lending since it was very profitable. A heck of a lot more profitable than originating government backed bonds. And if you securitize or resecuritize even more. At the time they made record profits. Problem was that the eventual record losses were far more than the profits. So, did CRA help contribute to excessive asset prices? Good possibility. Did they cause the bank and financial market problems? NO.
Curly Smith| 12.2.10 @ 9:38AM
Let's see... I'm an investment banker and I see a financial product that's paying a high return... then I see that the underlying asset is guaranteed... now since I'm an investment banker I have a handy risk/reward calculator so I crunch the numbers and it says "all reward, no risk, buy as much as you can". Why wouldn't I buy the product?
Now I'm a mortgage lender... I can charge sub-prime borrowers a higher interest rate because, well, they're sub-prime. They're higher risk loans so I get to charge more. Potentially bad for me as I'd be taking more risk but along comes Fannie and Freddie saying "Hey, loan those guys money and we'll buy their notes. And if you don't, our buddy Barney Frank will haul you in front of his committee and force you to listen to him". Now any sensible banker would want to avoid listening to Barney Frank so they sell large quantities of bad notes. I again crunch the numbers and my calculator says "all reward, no risk, sell as much as you can".
But there is no such thing as no risk. Ultimately the Government mandated investment fraud collapsed under the weight of it's own fraud. It's a shame that they didn't get the minds behind running Social Security and Medicare involved... oh, wait, they did!
jrs| 12.2.10 @ 10:19AM
Thanks for demonstrating your ignorance. Banks didn't get in trouble for buying guaranteed assets (although putbacks could change this). Banks do bundle guaranteed mortgages via cmos, but here the only risk is prepay and not credit. They got in trouble lending and buying assets they knew could be risky and didn't care. In fact demand for these assets was so much greater than supply new asset classes were formed (synthetic rmbs cdos) since banks couldnt find enough of these borrowers. Everyone knew there was no guarantee but who needs them when housing prices never fall. So did govt regupations play a part? Yes, by helping inflate prices, create a need for securitization via regulatory rules, and inspire a monopoly and lack of dilligence via the nrso. But at the end of the day backs got in trouble via greed. Capitalism is great but can be painful and not perfect (but better than alternatives).
dad29 | 12.2.10 @ 9:07AM
In a little-noticed transaction, the Fed Reserve purchased stock in vehicles which now own a portion of AIG.
How much "recovery" of TARP dollars resulted from that transaction?
See: http://market-ticker.org/akcs-www?post=173675
JP| 12.2.10 @ 9:31AM
Excuse me, but I was always under the umpression that TARP would allow the Treasury and Fed to buy up the hundreds of billions in toxic assets. This would stabelize the mortgage and bank giants; later, the federal government would auction these properties off, and all would be well.
But it wasn't TARP that stabelized the banks. In March of 2009, Congress removed the Mark-to-Martket accounting rules, which allowed banks to value thier properties in a much more sane fashion. In one day (the day Obama signed the changes), the banks were off the hook -that is, there was no need for TARP. A number of institutions on Wall St (including AIG and Goldman) begged Congress to remove Mark-to-Market in September of 2008. No go. This was a crisis that not only could have been avoided, but was totally unnecessary. If rubes like me could have figured it out, I'm sure geniuses like Hank Paulson could. What is that famous Rahm quip? "Don't let a crisis go to waste?"
So, TARP money was used to gobble up AIG, GM, and Chrysler. Congress has no authority to oversee how the funds are managed. Check. But, lost in the buzz is the creeping realization that all is still not well in our real estate markets. The October numbers were dismal (foreclosures up; property values down). And now Europe is reeling and is coming to the rescue.
Could 2011 evolve into 1931. Can anyone say Credit Anstalt?
PattyMor| 12.2.10 @ 10:03AM
TARP is all part of the 'ruling class" partnership between government and big business. Goldman Sachs etal. can make big risky bets, and the government backstops the massive losses. The
financial institutions make a boatload of money and they recyle someone it back to the politicans.
In the old days, we would call this fascism. It certainly not capitalism.