Judging TARP

http://blogs.reuters.com/felix-salmon/2010/10/07/judging-tarp/

Felix Salmon
Judging TARP
Oct 7, 2010

Warren Olney had a very interesting conversation this afternoon about TARP, as the official disbursements come to an end and the debate begins over whether or not it succeeded.

The official spin is that TARP was a great success. But the official spin is decidedly unconvincing:

Businesses have added jobs for eight straight months. Private investment and confidence in banks have returned. The cost of borrowing for businesses, municipalities and individuals has declined dramatically.

This is true, but it has nothing to do with TARP: instead, it’s almost entirely a function of monetary policy. TARP might have arrested the global panic for long enough that Bernanke’s policies had time to start working, but that’s about it.

Treasury complains that the public think of TARP as being mainly a bank bailout — but in fact that’s exactly what it was. The Detroit bailout might have been done very well, but it was an afterthought, done with funds left over which hadn’t gone to banks.

As a bank bailout, TARP was if anything too successful. The banks were largely responsible for causing the global financial crisis which left millions of people kicked out of their homes, laid off from their jobs, or both. But then, with the TARP bailout, they rapidly bounced back; the bankers who remain — and that’s most of them — are now anticipating bonus checks to rival what they were receiving at the height of the credit bubble. The little guy was hurt hard; the fat-cat bankers are smiling, unremorseful, and back to their old ways already.

Politically speaking, bank bailouts are always going to be fraught things. And the way to prevent the kind of public anger we’re seeing right now is to ensure that while the banks might survive, the bankers have to be prosecuted — just the way they were in the 1930s and in the 1980s, after the S&L meltdown. That hasn’t happened: there has been no accountability for the financial crisis at all. Which is naturally going to make people angry.

And the government tends to go very quiet when asked whether TARP has lived up to its stated aims, which included much more than rescuing banks. TARP was meant to boost small-business lending, for instance; it hasn’t done that. And it was also designed to help the foreclosure crisis — which instead has got worse.

Finally, TARP failed at the very thing enshrined in its name: doing something permanent to solve the problem of troubled assets at banks. Under its original conception, TARP was meant to be used to buy up those assets and get them off banks’ balance sheets. But that plan went by the wayside, and was never resurrected. And so all those troubled assets are still there, festering.

We’re still a long way from being able to render a final verdict on TARP. But the best that can be said for it at this point is that it helped to arrest the sickening downward spiral that the global financial system was falling into, and that it came in handy for bailing out the automakers. Against that, it failed to get banks lending again; it failed to do anything about the foreclosure crisis; it failed to make any kind of a dent in the unemployment crisis; it failed to hold bankers accountable for their actions; and it succeeded in generating a broad-based mistrust of institutions: the government and the financial-services industry certainly, and the judicial system possibly as well.

TARP was always a rushed, ad hoc policy; even its architects never really had much of a vision for how it should be used. As such, its failure comes as little surprise. But let’s not try to pretend that it was some great success. Yes, it’s good that most of the money is likely to be repaid. But that’s neither necessary nor sufficient for TARP to be considered a success.