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Thursday, March 17, 2011

Evaluating TARP

Today’s TARP hearing at Senate Banking follows a slew of recent reports. The Congressional Oversight Panel (COP) issued its final report yesterday. Economists Simon Johnson, Allan Meltzer, Joe Stiglitz, and Luigi Zingales submitted testimony to COP two weeks ago. The Special Inspector General for TARP (SIGTARP) issued a comprehensive review in January. Three members of COP published an oped in today’s Wall Street Journal.

A common theme is the high cost of the TARP. I‘m not talking about whether the government lost or made money, which is not a good measure of effectiveness, but rather the costs to the economy (stability, growth, employment, etc). Since November 2008 I have been writing about the costs of the chaotic rollout of the TARP which in my view worsened the crisis and exacerbated the panic. (Here is my written testimony for today’s hearing.) In his recent book former FDIC chairman Bill Isaac concluded that “any objective analysis would conclude that the TARP legislation did nothing to stabilize the financial system that could not have been done without it. Moreover, the negative aspects of the TARP legislation far outweighed any possible benefit.” In his recent testimony Joe Stiglitz said that “TARP has not only been a dismal failure…but the way the program was managed has, I believe, contributed to the economy’s problems.”

Of course others are more positive about the stabilizing effect of TARP. Timothy Massad, current acting assistant secretary of Treasury, argues that the TARP prevented a more severe panic, citing as empirical evidence a paper by Alan Blinder and Mark Zandi. However, Blinder and Zandi explain that they don’t do a separate evaluation of the TARP: “We make no attempt to decompose the financial-policy effects into portions attributable to TARP, to the Fed’s quantitative easing policies, etc,” they say, so this is not really empirical evidence. COP is also positive about the short run impact though less positive than the Treasury

Though some disagree about the net costs of TARP in the short run, few disagree that the longer-run costs are substantial. In January the SIGTARP listed these costs:
· “damage to Government credibility that has plagued the program,”
· “failure of programs designed to help Main Street rather than Wall Street,”
· “moral hazard and potentially disastrous consequences associated with the continued existence of financial institutions that are ‘too big to fail’”
The COP final report listed these costs:
· “continuing distortions in the market”
· “public anger toward policymakers,”
· “a lack of full transparency and accountability.”
At the COP hearing, Stiglitz, Meltzer, Johnson, and Zingales (who rarely all agree) were unanimous in their view that the TARP actions have created an incentive for financial institutions and their creditors to take high risks due to the expectation of being bailed out, favoring big players and leaving the economy vulnerable to financial crisis. They also agreed that the Dodd-Frank legislation did not solve “too big to fail.”

To these costs I would add that the TARP established an unfortunate precedent of heavy-handed government intervention in the operations of businesses. The government forced some financial institutions to take TARP funds, even those that said they did not want them, by threatening actions from regulators. The government used the TARP for purposes other than originally stated in Congressional hearings, including the bailing out of automobile companies.

TARP is not popular with most Americans. Economic evaluations now rolling in support their view, but rather than pointing fingers, it is time to absorb the lessons and take actions to remove the legacy costs and try to end government bailouts as we know them.