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Home Publications Blogs Beat the Press TARP Martyrs: The Post Mourns Politicians Who Lost for Helping the Banks

TARP Martyrs: The Post Mourns Politicians Who Lost for Helping the Banks

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Monday, 05 July 2010 06:57

The lead editorial of the Washington Post today mourned the "TARP martyrs" (seriously) who lost their seats in Congress for having supported the bank bailout. The Post's main points are that we were threatened with "financial Armageddon" had TARP not passed (talk about shrill), and it really didn't cost us any money.

Starting with "financial Armageddon," let's use a little common sense. Suppose TARP had not passed. The Fed actually already had enormous power to lend money to keep the financial system operating. The most immediate threat to the system, which Fed Chairman Ben Bernanke and others highlighted, was the risk that the commercial paper (CP) market would shut down. They claimed that even healthy corporations were unable to borrow in the CP market. Since most large corporations depend on the CP market to finance their payroll and other ongoing expenses, the loss of this market would quickly cause the economy to grind to a halt.

While there is some debate as to how bad things were in the CP market at the time (the Minneapolis Fed disputes the claim that the market was shutting down), the more important point is that this issue was irrelevant to TARP. The Fed had the power to single-handedly support the CP market. In fact, the weekend after Congress approved the TARP Ben Bernanke announced the creation of a special lending facility to support the commercial paper market. So, that part of the financial Armageddon story was just a fairy tale for children, reporters and columnists, and members of Congress.

Suppose the TARP money had not started flowing and we saw the chain of bank collapses continue. The two remaining independent investment banks, Goldman Sachs and Morgan Stanley, would surely have been killed absent TARP and other special assistance from the Fed. It is all but certain that Citigroup and Bank of America would have gone belly up as well, along with many other large financial institutions.

Would this have led to financial Armageddon? Well, it surely would have created considerable disorder in the financial markets and led to a few million lawsuits, but the Fed and FDIC no doubt would have taken over these institutions to keep the system of payments operating. The Fed had a contingency plan to take over the money center banks in the 80s when they were threatened by large amounts of bad debt in Latin America. It is inconceivable that it did not have a similar plan in place following the collapse of Bears Stearns in March.

This means that "financial Armageddon" would have meant the demise of Goldman Sachs, Morgan Stanley and most of the other Wall Street titans, but probably would not have led to a qualitatively worse economic situation for the rest of us than what we actually saw. In fact, there would have been a great benefit from this financial Armageddon in that it would let the market wipe out the fast dealing high flying Wall Street gang in a single blow.

This would eliminate the culture of synthetic CDOs and naked credit default swaps that provide ever more sophisticated and expensive ways to gamble. It would also eliminate many of the huge multi-million dollar paychecks that the Wall Street boys take home every year (or week). In other words, this is not obviously a bad story.

The other misleading aspect of the Post piece is its haughty claim that the TARP did not cost taxpayers any money. It is not clear whether this is an assertion based on ungodly stupidity or is just plain dishonest.

The TARP money was a form of insurance. The vast majority of insurance policies are never paid off, but that does not mean they have no value. The point here is that the banks were on the edge of going bankrupt. Private investors would not touch them. The government, through the TARP and the Fed, gave the banks the loans and the guarantees that assured the markets that the banks would survive. This meant that private investors could trust their money with the banks. That allowed the banks to weather the crisis that they had themselves created. They are now back on their feet and again paying their "top performers" tens of millions a year in bonuses.

Does the Post really not understand that TARP money was enormously valuable and imposed huge cost on society? If, back in the fall of 2008, the government had given a thousand community groups hundreds of billions of dollars of loans, accompanied by trillions of dollars of loan guarantees, these organizations could have used this money to make loans at very high interest rates and buy up assets at bargain basement prices. In this story, there would be no risk to the community groups, since if things went badly the government would be out the money. Of course, if the economy recovered, then they would be enormously rich, with large claims on society's resources as a result of successfully betting with the government's money.  In the Post's account, the prosperity created for these community groups would have cost taxpayers nothing.

This is the story of the TARP. If the government had not been so generous with the Wall Street banks, Goldman Sachs shareholders would not have claims to $67 billion of the economy's output. Morgan Stanley's shareholders would not have claims to $32 billion of the economy's output. This is all a gift from the taxpayers to some of the richest people in the country. It is hard to believe that the Post's editorial writers do not understand this fact.

 

 

Comments (7)Add Comment
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written by izzatzo, July 05, 2010 10:24
In fact, there would have been a great benefit from this financial Armageddon in that it would let the market wipe out the fast dealing high flying Wall Street gang in a single blow.


Baker reveals his true colors, justifying the theory of creative destruction a la Hayek and Schumpeter, the only kind of competition worth having. Let private monopolies develop as much power as they like, because eventually they will become stagnant and suffocate in their own greed, toppled by the ongoing march and entry of new technology and innovation with fresh ideas that replace old ones.

Note to teabaggers: A traitor has been discovered in the midst of progressives who is passing himself off as an Austrian. Go to Red Alert and reverse teabagger claims that TARP was a free riding giveaway bailout for banks which should have been allowed to fail. Change the official message to support for TARP that rescued the economy, after which he will emerge from the crowd like a black swan among the white ones and be easily detectable for capture.
huh?
written by andy, July 05, 2010 10:56
what is izzatzo talking about?
...
written by coriolis, July 05, 2010 12:56
The Fed had a contingency plan to take over the money center banks in the 80s when they were threatened by large amounts of bad debt in Latin America. It is inconceivable that it did not have a similar plan in place following the collapse of Bears Stearns in March.
Don't be so sure there was a plan in place. This is the "Fed too stupid to see a 10 trillion dollar real estate bubble".
...
written by d4winds, July 05, 2010 2:13
fantastic post!
...
written by skeptonomist, July 05, 2010 8:46
My own tracking of certain data at the time was consistent with what the Minneapolis Fed wrote in their paper about the myths of the crisis. The only indication that the CP market was "shutting down" were the claims of Paulson, Bernanke et al; almost any firm could borrow at rates no higher than what was ordinary a few months earlier (highest-rated borrowers were not affected at all), and trading volumes never dropped off. Another fairy tale claim was that commercial banks had "stopped lending", which was again contrary to actual data on lending volumes (volumes did drop off later as the recession kicked in). Instead of looking at actual data, most economists with a public voice, as well as the media and Congress, bought into the propaganda, in a way reminiscent of the acceptance of government propaganda about the mythical WMD of Iraq. Dean Baker was about the only exception to this gullibility that I recall.
25 more exceptions
written by AndrewDover, July 05, 2010 9:15
"The point is this is one of the most important irrevokable economic decisions we will ever make. Let's make it in a state of panic." said who?

http://www.10zenmonkeys.com/2008/09/24/25-harshest-reactions-to-the-wall-street-bailout/

"Many people on both the right and the left are outraged at the idea of using taxpayer money to bail out America’s financial system. They’re right to be outraged, but doing nothing isn’t a serious option. Right now, players throughout the system are refusing to lend and hoarding cash — and this collapse of credit reminds many economists of the run on the banks that brought on the Great Depression." said Paul Krugman
http://www.nytimes.com/2008/09/26/opinion/26krugman.html?ref=paulkrugman
timberland shoes store
written by timberland for you , September 11, 2010 4:48
Tucked away in our timberland for you subconscious is an idyllic vision. We see ourselves on a long trip that timberland 6 inch spans the continent. YQ

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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