TARP: Wasting A Crisis
Last Sunday, my son asked me what I thought about the WaPo article “Treasury Secretary Timothy Geithner tackles five myths about TARP.” Here's my reply.
There's a lot of truth to the specifics, but his overall evaluation is way off because he looks at it by cherry-picking specific points, and also restricting his evaluation to the bank situation alone, and assuming that the proper goal was to save the big banks at low cost rather than to save the economy. So here are things the Administration and Geithner could have done if they had ended TARP and taken a different course.
1. They could have opposed the change in accounting allowing the banks to dismiss the mark-to-market rule and then taken the banks into resolution since their balance sheets would have shown insolvency.
2. They then could have gotten the toxic assets off the books of the banks
3. They could also have ensured that loan funds would flow to business because the Government would have been managing the banks and simply could have directed it. Instead of holding on to bailout funds and using them to gamble in the international “casino” they would performed one of their most important social functions – lending to business. This would have helped with the very much needed bailout of Main Street
4. If the Government had control of the banks then the finreg bill could have been passed much more easily and would have been much stronger in regulation of the FIRE sector, since the Government would have prevented many bank millions from going into lobbying efforts to oppose finreg, and ensure that it would be watered down. Under Government management the big Banks would have ceased to be a political force. This is one of the most important advantages of taking them into resolution for anyone who wants to fix the FIRE sector.
5. The Government could also have ensured that credit card interest rates would have been at 6 points over prime (or 6% or so) right now, rather than the 15% average we are seeing from the cc companies. The difference is a very appreciable stimulus to the economy. Also, if the banks were in resolution they would not have been able to oppose the credit card reform bill. So a much better and stronger regulatory bill would have emerged
6. With the banks gone as a political factor, the opposition to Obama's stimulus would have been much less powerful. So he may well have gotten the $1.6 Trillion stimulus needed to end unemployment and bring the economy all the way back. We'd be seeing prosperity by now.
7. If the Government had the banks in resolution, the huge bonus payments to the already overpaid would have been avoided, and that political issue would not have been there to bedevil the Democrats.
8. With the big banks in resolution there would have been much less opposition to health care reform from Wall Street and the FIRE sector. The health insurance companies, which are tied very closely to the FIRE sector, might also have had far less in resources to bring to the health care reform fight. Bottom line? The Democrats might have gotten Medicare for All, or at least a bill that extended Medicare to far more of the population.
9. If the Government had taken over the banks, it could have opened up the books to the Justice Department and discovered the fraud that lies at the basis of the real estate/home mortgage/CDS nexus. It could have prosecuted and jailed executives involved in the fraud and brought a measure of justice to the situation. It could have cleaned up the foreclosure mess a long time ago, instead of having the mess explode now and threaten us all with that second dip, perhaps into a full-blown depression, if the political system falls prey to austerity disease.
10. If the Government had taken the banks into resolution and done all these other things, then the banks could have been spun off to private capital by now, but would surely be politically much weaker. So the Democrats would not only have a much better track record than they have now, having bailed out Main Street and cleaned up Wall Street; but they also would have far less in FIRE special interest money to contend with in this election. The Dems might now be looking at a victory, and Obama would be in the process of moving forward with our other critical problems: energy, education, the environment, climate change, ending the wars, the $3 Trillion infrastructure problem, extending the social safety net, and so on, instead of facing two years of paralysis working against a Republican Congress going nuts over balanced budgets, and waxing eloquent about their wedge issue of the month.
So, all in all, I have to say that one's evaluation of the TARP depends on what one's goals and expectations were in the first place. If you assume the goal was to save the banks and stop a total crash of the economy, at a modest long-run cost, then it's probably a success.
But if you assume that the need was for a policy that would contain the damage to the economy, lay the foundations for recovery, strengthen the Governmental framework for regulating the financial sector, bring a measure of justice to the situation, take consumer interest rates out of the usury territory, contain the home foreclosure problem, make sure loans flow to business, and also move the balance of power in the political system away from the corporations and towards the people, prove the effectiveness of Government in handling a crisis, and maximizing the chances of the Democratic Party to stay in power, then the Administration's handling of the banks through continuing TARP has to be counted a miserable failure for us all, and a fine example of “wasting a crisis.”
When I sent this reply to my son, I also copied my friend, Warren Mosler, one of the World's great economists in my view, and currently the Independent Party candidate for the US Senate in CT. Warren was kind enough to reply, and some of his comments recorded very interesting disagreements with my views. So I hope he'll favor us with comments here too.