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 The government hasn’t yet withdrawn this guarantee, and so it’s still on the hook.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.