I invite you to read the comments to this post at Outside the Beltway. One thing struck me about the comments. All of the commenters seem to accept that a) the program was necessary to save the financial sector and b) that it was successful in saving the financial sector.
It seems to me that the actual evidence is pretty meager on both counts. Obviously, it’s pretty hard to prove a counter-factual so we’ll never really know whether action by the federal government was necessary to prevent a meltdown or what did occur would have occurred regardless of what the federal government did.
The evidence that TARP worked is even more meager. That’s an assertion about the future: it claims that, as a consequence of TARP (or its successors), the banking system has returned to health and stability. Is that really the case? Or are things merely in a state of suspended animation?
There is a somewhat weaker claim: that TARP was psychologically necessary, either to the financial sector or to the country at large and that has worked. I’m even less sure of that one. It seems to me that the country at large is pretty shaky and the financial sector has taken away a lesson we’d just as soon they not have them believe, that there’s nothing they can do that’s so stupid that they’ll be allowed to experience the consequences of their folly.
Update
…the U.S. financial system appears to be a nicely painted dam, behind which a massive pool of delinquent debt is obscured. A significant correction in valuations and resolution of the growing backlog of delinquent debt may finally restore strong “investment merit” to the U.S. stock market, but only after a greater amount of pain and adjustment than most investors seem to anticipate.
Moreover, the tacit assumption in the Geither comment, and other Administration defenses of its bank-friendly actions, is that the choice was the program that the Administration implemented or no intervention at all. But that is bunk. There were plenty of other options for shoring up the battered financial firms; giving them generous support with virtually no strings attached, and in particular, no changes in management, was unheard of, at least outside of kleptocracies. Various forms of resolution, in particular the Nordic model, were widely discussed early in the Obama Administration and pointedly ignored. The Obama crowd took a tough line with the auto companies, dispatching its top brass, forcing the recipients to produce long term plans, forcing bondholders and union members to take haircuts. Why did the banksters get kid glove treatment? The answer is all too obvious: financiers are one of the biggest sources of campaign contributions.
The TARP was created by the Bush regime; why not distance yourself from it or deploy it differently? This Administration has chosen to make the TARP its own and has no one but itself to blame for the consequences.
Unprovable isnt it, either way. But then, that is true of lots of stuff. If we put out a fire, how do we know if it was going to burn out on its own or spread? We need an alternate universe to test these things. I tend to trust the opposition, but maybe that goes too far. If Paulson, Bush, Greenspan, Bernanke, all conservatives, and in the case of Greenspan an out and out Randian, thought things were going to crash, I tend to trust them.
Steve
It depends on what rules you’re operating under. If you’re operating under the rules of logic, the burden of proof lies on the affirmative. Those advocating a plan need to argue for its need and effectiveness.
If you’re operating under the rules of bureaucracy in a crisis under which doing nothing can get you fired and doing the wrong thing will be excused, you’ll always do something and the burden of proof is on the negative.
Operating under the rules of bureaucracy virtually guarantee we’ll do lots of dumb, ineffective things.
I think looking at the record-making TED spread in late 2008, the banks needed to be kept liquid. I still think it was a good idea to throw money at the banks.
Yves Smith touches on an important point though. TARP was a discretionary spending measure. Some of the complaints about TARP are not necessarily legislaive (other than whether the legislature should have provided a red stamp), but have to do with execution. We wasted an inordinate amount of time and political capitol dealing with bonus pay. We ended up with bigger banks. There have been oversight issues. And all of the issues arising from the auto bailouts.
As far as metrics, I would point to the TED spread, which was at record levels in October when TARP was signed. It was returning to normal by January and essentially bottomed by September. TARP wasn’t supposed to end foreclosures, lower unemployment, fix the auto industry’s structural problems.
As far as burden of argument issues, velocity has to be taken into account. Newton’s First Law. The credit markets were in the process of freezing, unless the process was stopped. That process was stopped either due to an outside force independent of TARP (quantitative easing), TARP itself, or the intangible confidence provided by a government commitment to prevent the credit marks from freezing.
PD:
I notice that you appear to be arguing necessary. Are you also arguing that it was sufficient? IMO to argue that “TARP worked” you would need to argue that it was both necessary and sufficient.
I’m not arguing sufficient and I’m arguing a more narrow definition of what was necessary. I think it was necessary to stop the freezing of the credit markets. The other tasks TARP was assigned, such as saving the auto industry and stopping home forclosures, were not central to TARP’s purpose, and I don’t believe were done well. The longer term problem was financial reform.
PD:
I notice that you appear to be arguing necessary. Are you also arguing that it was sufficient? IMO to argue that “TARP worked†you would need to argue that it was both necessary and sufficient.
Put me in the camp that it was necessary that something be done to unfreeze the credit markets at that time. Whether TARP itself was necessary is another argument. As it ultimately proved insufficient, as we got ARRA (not directed at the banks but at restarting the overall economy), HAMP, TAPR 2 (and the stupid-assed changes to FASB rules), QE (and soon QE 2) and eventually a financial reform bill that effectively did nothing. All of those programs in one way or another were designed to keep the economy (and thus asset classes) from collapsing.
One can believe that the banking system bail-out (defined however broadly one wishes) was necessary but still think particulars were wrong-headed or counter-productive. For one thing, once the system was stabilized some of the systemic problems should have been ended – such as institutions that are TOO BIG TO FAIL. Instead of that we have endured two years of building even bigger institutions that won’t be allowed to fail. And that’s all the governing class seems to care about – building institutions that cannot be allowed to fail.
Too bad reality will intervene – nothing is too big to fail and institutions constructed as inverted pyramids on a foundation of sand are certain to fail. One would think MBSs would have taught us that.
Finally, I think you badly underestimate the impact of psychology on the economy and on financial institutions, Dave. Psychology alone can’t keep an economy viable, but bad impressions can ruin a firm (or sector) very quickly. One doesn’t have to look back at the bank runs of the 1930s for an example – one need only back to the sudden demise of Arthur Andersen following the ENRON scandal. One bad case at that firm and it was destroyed. Financial firms essentially are ALL built on trust and nothing but trust.
Ugh, how depressing. No accident that it reminds me of how other solutions to the health care dilemma were also “pointedly ignored.”
Hi, Dave!
One alternative — Bankruptcy! for each and every cash-flow insolvent big bank.
With the Federal Reserve becoming the “Bank of last resort” to fund over-night loans to other non-insolvent banks.
With the collapse of house construction in 2006, some 200 000 or more construction workers lost their jobs. The Financial Sector needed to shed workers, too.
One way for bankruptcy to work: wipe out equity, wipe out all bonuses (!), replace/repay obligation (e.g. from derivatives) debts by “new equity” in the rapidly restructured new bank, minus all of the fired top management (or all but one?).
TARP was set up to allow AIG & Goldman to avoid the fate of Lehmann; and to reduce the pain of mal-investment to the decision makers who supported that mal-investment. (Goldman in a second order support of AIG’s first order direct support).
And Fannie & Freddie should be bankrupted too, and recreated with new people, new contracts.
Lehman Brothers, RIP.