In the Fiscal Times, the liberal economist Mark Thoma points out that the government could have administered a bailout less damaging than TARP:
The perception that the government bailed out undeserving wealthy bankers while leaving households to fend for themselves is a big part of the backlash against the policies put into place to help with the recession. That perception is correct, for the most part, and it will stand in the way of repeating this policy the next time there is a financial collapse. When the next balance sheet recession hits, and another one will hit no matter how hard we try to avoid it, we need to do a better job of helping households. Not only is this good economics – we will recover faster with this policy – the politics of helping households are far superior to those associated with bailing out banks.
By "balance sheet recession," Thoma means that the collapse of the housing market left almost everyone, from state governments to individual households, with more liabilities and fewer assets than before. This change in balance sheet status means that people are less willing to commit to spending money until they are able to pay down their debt. Saving Morgan Stanley and Citigroup does little to accelerate this process.
So Thoma is arguing that instead of expending political capital and trillions of dollars to save investment banks, the government should have instead used some of those resources to shore up ordinary people's balance sheets. The Making Work Pay tax break in the stimulus bill had this effect, and should have been a larger part of the bill, replacing slow-to-move and wasteful handouts to political constituencies. In fact, probably the best such measure would have been a payroll tax holiday -- something that Republicans supported from the beginning of the crisis, and that will now be partly enacted in the tax deal just hammered out in Congress.
What Thoma doesn't mention in his article is that his line of logic -- that the bailouts could have been designed in a way that would have been better for the country -- is inadmissible in the administration's view. Just last week, Timothy Geithner, the steward of TARP under Obama, proclaimed that TARP was "one of the most effective crisis response programs ever implemented," explaining that the cost of the program will prove to be "incredibly small" relative to other financial rescue packages.
As Thoma makes clear, though, the question is not how simply how much the program cost. To think so would be ludicrous. The question is whether the administration could have spent its political and economic capital in a way that would have led to better economic conditions today. And to that question, the answer is, without any doubt, yes.
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