October 12, 2010
A week ago Sunday, the Troubled Asset Relief Program became history. This Sunday, Secretary of the Treasury Tim Geithner wrote his draft of that history in a Washington Post editorial:
“Born at the peak of the financial crisis in 2008, the Troubled Asset Relief Program expired last week, ending what was perhaps the most maligned yet most effective government program in recent memory …The program was essential to averting a second Great Depression, stabilizing a collapsing financial system, protecting the savings of Americans and restoring the flow of credit that is the oxygen of the economy. And it helped achieve all that at a lower cost than anyone expected.”
“It could have been worse” is not a winning
Unfortunately for Geithner’s fellow Democrats in the coming mid-term elections, American voters remember TARP’s history rather differently. What they recall is a $700 billion blank check written by Washington elites to their pals on Wall Street, allowing the latter to keep their obscenely overpaid jobs, despite having just piloted the economy into the side of a mountain. Picturing how bad things might have been without TARP, policy makers largely side with Geithner. Recognizing how bad things are even with TARP, voters don’t. As Brookings Institution fellow Douglas Elliott describes the wonk-voter perception gap, “The TARP is probably the best large federal program ever to be despised by the public.”
True, the public’s grasp of political economics is not subtle. Voters are no good with counterfactuals. (“It could have been worse” is not a winning campaign slogan.) And yes, $700 billion is the wrong number to fixate on. That doesn’t mean, however, the public is entirely wrong about TARP.
“It was clear to me that everyone from both
administrations was flying in the dark without
a control tower.”
To evaluate the program, think back to the panicky days of late 2008. At the time, policy makers from the lame-duck Bush administration and the incoming Democrats found themselves in a fast-moving crisis for which there was no manual. “It was clear to me that everyone from both administrations was flying in the dark without a control tower,” says Jonathan Baron, a psychology professor at the University of Pennsylvania and the editor of the journal Judgment and Decision Making. So they tried everything: The Federal Reserve exercised never-before-imagined powers. The FDIC expanded its insurance protection. The Obama administration rammed through a $787 billion stimulus package. And Congress passed TARP, giving the Treasury the authority to spend up to $700 billion to bail out struggling banks (along with GM and Chrysler).
To give the wonks their due, the collective effort succeeded in ending the financial panic, and Treasury never came close to spending the authorized $700 billion. Indeed, TARP’s total cash outlay is likely to be less than $50 billion after the loans are all paid back. The program could even turn a profit if the equity investments pan out.
TARP gave the Treasury Department
the power to determine who lived and who died
in the crisis.
On the other hand, TARP didn’t save the world all by itself. Harvard economist Kenneth Rogoff argues that Federal Reserve actions and loan guarantees did more to calm markets. As for the price, $50 billion sounds cheap for dodging the next Great Depression. And it would be, say CPA J. Mark McWatters and University of Kentucky economist Kenneth Troske, two members of the Congressional panel charged with oversight of TARP, except that any fair accounting of TARP has to include the $389 billion cost of nationalizing Fannie Mae and Freddie Mac, and the Fed’s purchase of $1.25 trillion of mortgage securities. Together those two Federal programs didn’t just prop up banks’ balance sheets; they also literally provided the cash that allowed them to pay back their TARP loans.
“When you’ve got someone by the balls in
a negotiation, you squeeze.”
In toting up the program’s costs, it’s also important to look long term. Like any strong medicine, TARP had some potentially dangerous side effects:
TARP enshrined the “Too Big to Fail” doctrine. TARP gave the Treasury Department the power to determine who lived and who died in the crisis, and under what terms. Thus, the major money center banks were all but explicitly anointed as survivors, at whatever cost to taxpayers. Backed by that implicit guarantee, all of those institutions can borrow more cheaply and take bigger risks than they otherwise would — setting the stage for the next financial crisis.
It left small banks out in the cold. Toxic loan cesspools like Citigroup and Merrill Lynch were rescued, but not smaller institutions like, say, Shoreline Bank of Washington, the most recent of 129 banks to go under this year. Granted, a small bank’s failure won’t incite a panic, but that doesn’t mean their extinction has no cost. “Community banks are the main source of loans for small-and mid-sized businesses,” points out Columbia University economist and Nobel laureate Joseph Stiglitz. “And who does most of the hiring? Small businesses.”
It let reckless banks off easy. The loans extended under TARP were exceedingly generous, considering the risk that taxpayers could have been stuck with the bill for massive failures. Warren Buffett got better terms for his investment in Goldman Sachs just a few weeks before TARP. “When you’ve got someone by the balls in a negotiation, you squeeze,” says Karl Smith, assistant professor of public economics at University of North Carolina. “We should have taken the banks for more than we did.”
Voters may veto a TARP next time. Public anger at TARP runs so high that some banks reportedly have refused TARP money rather than bear the stigma. “The extreme unpopularity of TARP has made it all but impossible to do anything remotely like it again,” wrote Princeton economist Alan Blinder in his evaluation of the program. Therein lies the most ironic failure of TARP — and maybe its greatest cost. If the program really is as effective as its proponents say, future policy makers will desperately need it in their bag of tricks, should they need to save the world again. Unfortunately, TARP has made itself so unpopular, voters might prefer not to be rescued after all.
Reporter: Temma Ehrenfeld
Eric Schurenberg is Editor-in-Chief of BNET, the CBS Business Network