Revisiting TARP, two years later

I am surprised to find the buzz regarding the latest news on TARP is almost non-existent (except for some of my friends who have been curteous enough to wait for this post and express their views in the comments).  For those unaware, here it is (Bloomberg):

The U.S. government’s bailout of financial firms through the Troubled Asset Relief Program provided taxpayers with higher returns than yields paid on 30- year Treasury bonds — enough money to fund the Securities and Exchange Commission for the next two decades.

The government has earned $25.2 billion on its investment of $309 billion in banks and insurance companies, an 8.2 percent return over two years, according to data compiled by Bloomberg.

Now, because much of the opposition to TARP among the American people was driven by the anger over taxpayer bailouts, most TARP backers assume that all is well with the world simply because the government came out ahead.  I couldn’t disagree more.

For starters, we’re not actually sure of the entire TARP picture, as Todd Petzel told Bloomberg (same link): “But there are other costs as the government made it possible for the banks to pay back TARP. Those costs can turn out to be larger, and their legacy could last longer.”

More importantly, though, many of us who objected to TARP had more the simple populist anger on our minds.  These objections have not been salved by an additional $25 billion that the Democrats can waste before voters send them packing in 12 days.

To wit . . .

• It was unnecessary: Ostensibly, TARP was supposed to create a fund to buy all of the “toxic” mortgaged-based securities off the hands of ill banks. The “moral hazard” objection to this was obvious: if one allows investors and firms to avoid the consequences of risk, they’ll engage in more risky behavior that will cause even more problems down the road.  More specifically in this case, however, was the fact that the assets in question were artificially “toxic” under an accounting regulation known as “mark-to-market,” which forced firms to list the value of the assets at whatever the market would pay for them.  Thus, when the wave of foreclosures began, prices of these assets fell like stones – despite the fact that overwhelming majority of the mortgages backing them were not in default.  Thus, the long-term asset values were far higher than their prices, but the owners weren’t allowed to list their values as such.  The artificial red ink eliminated $500 billion in capital, which translates to $5 trillion in liquidity lost.  Mark-to-market, sadly, survived until April 2009.
• The dramatic government intervention in the economy: While the American economy was hardly a pure free market before the fall of 2008, TARP crossed into new territory, even if it had gone as designed.  Instead, it got even worse.  Despite its initial intentions, TARP also included language that gave the Treasury Secretary carte blanche do use the funds however he liked – a tremendouse expansion of government power.  Henry Paulsen (Bush’s Treasury Secretary at the time) promptly used his authority to announce the money wouldn’t go to buying off “toxic” assets, but to buy stock in banks instead.  As bad as that bait and switch was, Paulsen then dragged healthy banks into it – literally forcing them to take TARP money in a de facto eminent domain move that would have made New London blush.
• The damage done to the economy: When TARP was first discussed, the recession was about nine months old, but it was so mild that it hadn’t even been declared yet (the announcement would come after the election).  As voters coped with their anxiety, they looked to Washington and saw a political class wholly consumed by panic (or, to be more accurate, mass hysteria), a Treasury Secretary making it up as he went along, and banks that they thought were healthy taking TARP money – and thus giving off the impression that they were sick.  In short, the government took a serious credit crunch (albeit caused by an accounting rule) and turned it into a nationwide economic crisis in which all banks and financial institutions were smeared as weak and unable to survive.  Is it any surprise consumer and investor confidence sank?  That most of the job losses tied to this recession occurred in the months following?  Of course not.  Had the Administration and Congress acknowledge the true scope of the danger (deeper yet narrower than the perception given), the effect on the economy would not have been as damaging or as widespread.  Instead, events unfolded as they did (and the assets that supposedly caused all of this were left untouched).
• Finally, it stopped a desperately needed restructuring of the financial and auto markets: Dick Armey, an economist before and after he was a Congressman, noted this problem in his objections to TARP two years ago.  We tend to forget this now, but the banking sector was on its way to sorting itself out before TARP.  JP Morgan Chase bought Washington Mutual, and Wells Fargo actually managed to outbid Citibank for Wachovia.  The healthier banks were consolidating the sector and clearing out the weaker ones – until TARP forced them all to feign the same level of illness.  Obama basically did the same thing in the automobile sector.  I remain stunned that so many people believed the entire auto supply chain would go down if GM and Chrysler had gone to bankruptcy.  Had no one heard of Honda, Isuzu, Hyundai, Kia, or Mazda, to name a few?  What about upstart American companies like Tesla?  Or what about Ford, which refused TARP money and made itself profitable without it?  Instead, the moral hazard problem has extended from Wall Street to Detroit (one city that really does not need it).

In the face of these objections, the hey-it-made-money defense pales in comparison.

I’d be more willing to hear hey-we-didn’t-know-Paulsen/Obama-would-do-that defense. Some TARP supporters are trying to do that in re Obama and GM/Chrysler.  It doesn’t excuse it (after all, the bill explicitly granted Paulsen the authority to do whatever he wanted, it was a touted feature, not an accidental bug), but it would be better than showing me $25 billion (assuming it hasn’t been spent already).

Yet, sadly, many, many more have chosen to continue defending TARP, and whip up the panicked spirit of September 2008.  Never mind that none other than Richard Shelby – a former chairman of the Senate Banking Committee, thought this was bunk, and had a number of economists to back him up.

Or Marsha Blackburn, whose response is hardly the populist rage that so many TARP-backers believed was the unanimous view of opponents (NRO - emphasis added):

The responsible action is to pass the most effective legislation in as short a time frame as possible. The bill before us didn’t do that. It leveraged too many federal assets and too few Wall Street assets. It also ignored some market-oriented solutions that could be carried out immediately. Again, I’d look to options like mark-to-market reform, increases in FDIC insurance, etc.

I know I’m being repetitive, but waving $25 billion at us doesn’t make our objections go away.

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