Monday, September 20, 2010

On TARP -- No, It Did Not Work

Why are Democrats sticking up for TARP?

I fear it's a knee-jerk reaction to the vehement opposition against TARP from the tea party and other right-wing Republican groups.  It seems that anti-establishment Republican primary candidates used TARP as a club -- successfully -- against those incumbents that voted for it.  It's easy to make fun of the tea-party folks and assume that, if they're against it, it's probably a good thing.  But not this time.

With increasing frequency, I've heard Democrats and progressives stand up for TARP because "it worked."  We avoided a complete collapse.  The government even "made" money on it!  Stephanie Miller, for example, on Friday said that it was one of the things she thought George W. Bush did right.

Let's be frank -- it was a disaster.  It did not "work."  Here's why:

In mid- to late-2008, our financial sector and the world economy were on the brink of collapse.  We certainly did need to do something.  The government had essentially three options: some kind of cash infusion, some kind of tighter regulation, or some combination of the two.  Given the banking industry's dire straits, the government had an incredible opportunity to institute some reforms to help ensure this wouldn't happen again.  But we did nothing.  Nothing, aside from writing a blank check to virtually any institution that could fill out a four-page application.

Let me draw an analogy.  Imaging you have a crazy, ne'r-do-well cousin.  He's a drinker and a gambler.  Late one night he pounds on your door, barges into your living room and explains that he's in debt to some Vegas loansharks for $70,000 to cover gambling losses.  He's way past due and they're going to hurt him.  Oh, and because he gave them your name, they're going to hurt you and your family as well.

Given no choice, you get the money.  You empty your bank accounts, borrow money from your 401(k), even break open the kids' piggy banks.  He takes the money and heads off.  You know it's money you'll never see again.  Had to do it.  Maybe we can push back retirement a year or two.

Some time later, your cousin returns.  He's all smiles.  It turns out that he only owed $50,000 to the loan sharks and, with the extra $20,000, hit the craps tables.  But he hit a good run and turned that $20,000 into $120,000.  He gives you back the $70,000 you loaned him, an additional $30,000 for interest, and keeps the remaining $20,000 for himself.  He's going to do it again -- turn that $20,000 into a small fortune.  Off he goes.

Now, your "loan" to your cousin didn't "work."  Sure, he didn't die.  He gambled and won, paying you back.  But that's no investment.  And worst of all, you let your cousin and the loansharks know that, when it comes down to it, you'll cover the bad debts.  You have all but ensured this will happen again, and probably worse next time.

That's almost exactly what happened with TARP.  Large financial institutions leveraged themselves to the hilt making speculative investments -- gambling -- and faced ruin when those bets went bad.  The Bush administration and Congressional leaders browbeat the legislature into signing a massive check, with no strings attached.  The banks took the money, paid off their debts, and immediately returned to extreme risk taking.  In this way, TARP didn't "work."  Yes, we avoided disaster.  Today.  But because we took no steps to ensure it won't happen again, we have all but guaranteed that it will.

What would we do with our cousin?  Well, perhaps insist he go into rehab before he gets the money.  Take him to a Gambling Anonymous program.  Call up the loansharks, let them know that you'll cover it this time, but you're tapped out and just kill him next time.  Yes, that's extreme.  Those measures may not work.  But it's beyond negligent to require nothing of those who claim they need all your money to cover their bad decisions.

1 comment:

  1. Yes, "just kill him next time" indeed. It's incredible to me that the same Republicans that shout about free markets, free enterprise and getting the governments hands out of commerce would so shamelessly ask for and accept a bail-out. Fundamentally it opposses the concept of free markets and the win big/lose big dreams of capitalism. It is an enormous governmet intrusion on business - the Right looks to have it both ways. We want our profit to be left alone, we want our debts to be absorbed by the public. How could the politicians and the public get so hosed? How is it that big business gets a bail out paid for by the tax payers and the tax payers get home foreclosures and massive lay offs in return? Who is supoosed to protect us from this sort of robbery?

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