TARP - a few random thoughts 18 months later

Yes, in some cases, it's better to let the free market be the free market, and sometimes markets fail. Let's just assume that they didn't pass TARP. What would have happened? Yes, there may have been a major collapse of the large investment banks, and yes, there may have been a lot of pain...in the short term. We don't know how bad it would have been, however I don't think it would have been as bad as the so-called experts predicted. On the other hand, what message has the government sent to Wall Street with TARP and all the bailouts? The message is that excessively risky behavior is OK, and if we take on too much risk? No worry. The government will bail us out again. So where does it end? By bailing out the largest investment houses, the government has simply reinforced the bad behavior, and now there is no incentive to discontinue it. TARP did nothing but reinforce the excessive risk taking....a problem that the government got us into in the first place with easy money from GSE's like FNMA and FDMC. TARP has only delayed a much greater collapse down the road. A collapse that will be infinitely greater because "Helicopter Ben" seems to think that printing money to increase the FED's balance sheet is just fine as long as there is short term liquidity in the market. In my opinion, inflated currency and China owning our debt is a much worse long term scenario.

The current financial reform legislation in congress is also going to ensure large companies that are "too big to fail" will continue to receive bailouts indefinitely. Again, reinforcing risky behavior and making private enterprise too heavily dependent upon the government. Something the founding fathers, especially Thomas Jefferson railed against.

After TARP passed, I remember hearing Bush say that he had to "abandon free market principles to save the free market". Totally incredible, and a complete load of crap in my opinion....

To be fair, I will say that Paulson's idea (TARP) was much better than Geithner's (buying preferred stock in the large investment banks). I hate the idea of the government owning majority interest in private corporations. Buying the illiquid assets due to the market failure was a better idea, and much more "market friendly" than the preferred stock route, which is what we eventually did with most of the TARP funds. Now what is the current administration doing? They're criticizing banks for tightening their lending standards, even though the loose lending practices are what got us into this problem in the first place.

There are a lot of really good resources on this, but for simplicity, I've pasted 2 NPR reports here. They give a relatively succinct and unbiased explanation of what caused the whole thing. Each episode is an hour long. Definitely worth the time, though.

Click on "stream episode".

http://www.thisamericanlife.org/radio-archives/episode/355/the-giant-pool-of-money

http://www.thisamericanlife.org/radio-archives/episode/365/Another-Frightening-Show-About-the-Economy