Criticizing TARP

By Felix Salmon
September 11, 2009
TARP investigation, and there are some good bits, like this:

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I’ve finally got around to reading the Vanity Fair TARP investigation, and there are some good bits, like this:

There were no internal controls to gauge success or failure. The goal was simply to dispense as much money as possible, as fast as possible. When Treasury began giving billions to the banks, the department had no policies in place to ensure that the banks were using the money in ways that met the purposes of the program, however defined. One main purpose, as noted, was to free up credit, but there was no incentive to lend and nothing to stop a bank from simply sitting on the money, bolstering its balance sheet and investing in Treasury bills. Indeed, Treasury’s plan was expressly not to ask the banks what they did with the money.

Given the sheer number of banks which received TARP funds after the most cursory oversight — indeed, every single bank which applied for such funds was approved — it’s inevitable that there will be some bad apples among them, and Vanity Fair has found a few of those apples. And more generally, as Andrew Leonard points out, it’s not clear what the alternative was:

They drop the ball by not tackling the $64,000 question more directly: Would it have been better to do nothing at all, and let the big banks fail, thus running the very substantial risk that the worst credit crunch in living memory metastasize into a full-fledged depression? Barlett and Steele could have found plenty of economists who, despite holding their nose at how irresponsibly the mass infusion of capital into the banking system was conducted, do believe that immediately stabilizing the system was a critical priority in the feverish months of last fall.

But the authors don’t quote a single economist.

I think it’s entirely fair to criticize TARP for having no stated aims or criteria of success. But there is an argument that there simply wasn’t time to do anything more considered. The problem isn’t that Treasury veered wildly from the original idea behind TARP — buying up bad loans — to a new idea of injecting equity. The problem is that after it made that decision, no one stopped to ask how best to enact the new policy.


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Is the belief that the “risk that the worst credit crunch in living memory metastasize into a full-fledged depression” based on a known and well established theory of bank contagion? Can anyone give references?

Is there any historical precedent to suggest that any of this could actually occur? When was the last time that bank failures actually triggered a depression, as oppossed to being concurrent with one (like the GD)?

Is it possible that the whole thing was just a big scare campaign, aimed at overcoming the resentment of the public to getting their money out of them?

Is it possible that the whole situation was simply a case of the amygdala overiding the pre-frontal cortex – given that the pre-frontal cortext was devoid of a model to provide understanding of the situation and a rational response – and that therefore the amygdala took over proceedings with a ‘falling dominos’ scenario to scare the system into ‘doing something’?

Capitalism is a distributed, bottom-up system – it is therefore largely immune to ‘systemic risk’. Those who believe otherwise are implicity considering Socialism, which is indeed prone to systemic risk. Right analysis, wrong socio-economic system.

Posted by Drewfus | Report as abusive

In February 2003, Daniel Davies had this to say about another signature initiative of the Bush Administration. His observations then held true for the next six years:

I find myself with a few spare minutes and make the mistake of reading Thomas Friedman again. His conclusion after a long, dull and witless ramble about the introduction of “democracy” to Iraq (just what the Gulf region needs, more puppet states) reads “If [it is] done right, the Middle East will never be the same. If done wrong, the world will never be the same”. There’s not much you can say to that except “shut up you silly man”.

But it does inspire in me the desire for a competition; can anyone, particularly the rather more Bush-friendly recent arrivals to the board, give me one single example of something with the following three characteristics:

It is a policy initiative of the current Bush administration

It was significant enough in scale that I’d have heard of it (at a pinch, that I should have heard of it)

It wasn’t in some important way completely fucked up during the execution.

It’s just that I literally can’t think what possible evidence Friedman might be going on in his tacit assumption that the introduction of democracy to Iraq (if it is attempted at all) will be executed well rather than badly. Worst piece of counterfactual speculation by Friedman since the day he pondered the question “If I grew a moustache well, I would look distinguished and stylish; if I grew one badly, I’d look like a pillock”.

You can look at Treasury’s actions in 2008 as a one-time event, or (as Drewfus appears to believe) as evidence of the malevolence of Capitalism itself. In my view, sadly, it was neither. It was the consequence of electing, twice, people who had no interest in making government work properly, and who demonstrated time and again that they would only do badly when put to the test.

Posted by Andrew | Report as abusive

I understand that bailing out the banks was essential to prevent an even more catastrophic meltdown of the economy.

However, I personally do not understand why handing banks large sums of money had to be done with absolutely no accountability at all.

The feds shifted gears rapidly after the first announcement of TARP – changing the focus from snapping up toxic assets to instead injecting liquidity into “the system.”

They shoved money into the banks faster than a shuttle heading into orbit.

Yet they couldn’t shift gears and ask banks how they’ve spent the government’s investment?

I also do not understand how a country can have a blameless meltdown of the banking sector. Yet a year after Lehman, not one person has been held accountable. Which means there is absolutely no reason for anyone involved in finance to change their behavior in any way. Uncle Sam’ll be there with $$ to help them out no matter what. AND they get their bonuses too. No moral hazard at all in banking…. for the bankers.

One main purpose, as noted, was to free up credit, but there was no incentive to lend and nothing to stop a bank from simply sitting on the money, bolstering its balance sheet and investing in Treasury bills. There were indeed massive problems with the oversight of TARP (and still are, as SIGTARP keeps reminding us), but I never really understood this criticism. What did people realistically expect to happen? The equity and debt markets were absolutely hammering banks, convinced that they were all desperately short of liquidity and capital. It would have been completely irrational for TARP recipients to do anything but use the funds to buy up Treasuries.

Posted by Ginger Yellow | Report as abusive