Last Updated Oct 1, 2010 7:25 PM EDT
For U.S. Treasury Secretary Tim Geithner, one the program's main architects, the answer is clear:
It wasn't fair. But it was necessary.A neat, but ultimately glib, summation. Not simply because fairness is essential to good governance, but because unfairness effectively kicks the problem down the road. After all, TARP and other federal solutions to the banking crisis weren't only aimed at preventing another depression. These measures, combined with the Dodd-Frank financial reform law, are supposed to fix certain fundamental flaws in the American financial system. If they fail, then we're on the road again, trapped in what Bank of England official Andrew Haldane memorably called a "doom loop."
The Congressional Budget Office recently projected the TARP's total cost at $66 billion. Yet the program's efficacy can't be measured in terms of profit and loss. This wasn't an "investment" -- it was a lifeline. To justify TARP because it generates a return for taxpayers is akin to consoling passengers on a burning jet that at least they have parachutes. I'll take Greyhound, thanks.
Geithner's verdict also glosses over a vital consideration -- that the $700 billion program, however necessary, could've gotten a lot more bang for the buck. Here's what that means: more forcefully protecting taxpayer interests; rectifying problems that led to the housing crash; reviving not only Wall Street, but the banking sector as a whole; and easing the worst effects of the crisis, such as the rising tide of foreclosures.
To date, TARP and related government initiatives haven't delivered on those objectives. One reason is that the feds attached few strings in arranging the bailout, said Nobel laureate economist Joseph Stiglitz in a speech Thursday in New York:
We provided money to the banks without condition. When money-center banks get money without any conditions, they are going to invest it wherever in the world they think they can get the best returns, even if that's not in the U.S. We could have said you can have this money only if you lend it in the U.S., but we didn't.Stiglitz also highlighted another basic problem with TARP -- it favored big banks over small ones. Financial giants, including what were at the time (and may still be) essentially insolvent firms like Citigroup (C) were saved, while community banks were left to flounder. Compared with previous rescue efforts, including those following the Great Depression, the feds showed exceptional largess in their lending terms. By contrast, private investors such as Warren Buffet secured much better deals.
We didn't put any conditions on the money we lent. If we intended the money for recapitalization, we could have said it's for recapitalization. But everyone from the President on down said this money will encourage the banks to lend. Well, are they lending? The flow of credit has gone down.
Such distortions jeopardize taxpayers and weaken competition. Said Stiglitz:
What do you do if you have less competition? You raise your prices. That's what banks are doing. So if you're a business and you want a loan, it will cost you more.Neglecting smaller financial institutions also threatens the nation's economic recovery. It's worth recalling that as the biggest banks were withdrawing credit from consumers and corporate customers alike in those dark days of 2009, more than four out of 10 community banks were boosting their business lending. And of course, small banks account for the vast majority of loans made to small businesses, which in turn generate more than 60 percent of new jobs.
Geithner's judgment of TARP also brushes aside what could be its greatest defect -- and precarious legacy. In reinforcing the Street at the expense of smaller institutions, it makes financial firms that were already "too big to fail" even bigger. Worse, it cemented a presumption in the financial industry that Uncle Sam stands ever ready to save it. As Harvard economist Ken Rogoff recently noted in a Congressional Oversight Panel report analyzing the impact of TARP:
[T]he bailout, with its huge generosity to the large "too big to fail" financial institutions, has greatly exacerbated moral hazard problems.Meanwhile, while Dodd-Frank and more stringent capital standards imposed by the Basel Committee will make big banks temporarily more resistant to collapse, the new rules don't do much to temper their appetite for risk. Much rides on whether financial regulators can implement, and enforce, additional safeguards. Recent history isn't encouraging on that front.
The question remains, however -- did TARP work? Even that's not easy to determine. Most economists and policy experts agree that the sum total of the government's interventions after September 2008 -- which included loan guarantees for financial firms, bank "stress tests" and other measures -- succeeded in averting financial calamity. Less certain is how much credit TARP deserves for that outcome.
One pointed critic of the program, economist Simon Johnson, concludes that TARP was a "necessary evil":
[I]t saved the American financial system from collapse -- but it was implemented in a way that was excessively favorable to the very bankers who had presided over the collapse. And this sets up exactly the wrong incentives as we head into the next credit cycle.Exactly where that next cycle leads is, of course, the greatest unknown. If another epic crisis hits, any government bailout had better be fair. Better yet, it should be unnecessary.
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