The Utility and Justice of TARP

by Will Wilkinson on November 20, 2009

Yglesias says:

I believe that absent the [TARP] bailout, we’d be looking at even higher unemployment today.

I think this is a plausible claim. But I don’t know of a satisfactory way to evaluate it. It’s plausible because some plausible theories about the nature of the financial economy and its interaction with the real economy imply its truth. But other plausible theories do not. My problem is that I don’t know of a satisfactory way to evaluate these theories. I’m not saying that there is no way to evaluate them, only that I don’t know what it is. It would be nice to form a responsible opinion about this sort of thing. Can someone please help?

One position that I think has been too often overlooked is that (i) absent some financial-sector bailout having certain necessary characteristics, the economy would be worse today, (ii) TARP had those characteristics, but (iii) it also had other characteristics irrelevant to the health of the financial and macro-economy that amount to corruption and injustice. I suspect that (iii) is true whatever the truth value of Matt’s counterfactual claim. If I’m right, it is consistent to condemn many of the particulars of TARP while remaining agnostic about its utility as economic policy.

  • Patrick
    You could measure (from federal reserve data sets) overnight lending between banks in the weeks before TARP was announced (huge dropoff) and then after TARP was passed. And or also, measure lines of credit that small businesses use to meet payroll. I remember that these got locked up during the panic and small businesses were worried they weren't going to make payroll (line of credit extended by bank based on the small business invoices to clients/customers) and would have to layoff.
  • horsecow
    I have no expertise to offer here -- I assume the players involved had a pretty specific idea of what would happen if they didn't take some action, but they could (and should) make that case themselves -- but what I find troubling about Will's point is that it allows him to have his cake and eat it too. He gets to live in the present where (for now) a complete economic meltdown has been averted, but also live in the past where we can reject the TARP plan, as if that decision in the past had nothing to do with conditions in the present. It's just another kind of unfalsifiable counterfactual. Maybe if we had rejected the TARP plan things would have turned out great, or maybe we'd be living in a Mad Max post-apocalyptic hellscape. In an alternate universe, maybe WW is sitting in a bombed-out office block, vainly imitating the practice that in the Good Old Times was known as "blogging", typing the following sentence on the broken shell of a laptop: "Maybe TARP would have been a good idea after all..."
  • This paints somewhat of a different picture

    http://abcnews.go.com/Business/SmallBiz/small-b...
  • y81
    "the smaller and medium size banks were prevented from rising to the occasion. "

    That would be more plausible if a significant portion of the TARP funds hadn't gone to smaller and medium size banks.

    In general, I would analyze this question, about the beneficial effects of TARP, the same way I would analyze global warming, i.e., by asking: What is the preponderance of opinion among academic specialists who study the issue (i.e., in this case, economists)? What is the preponderance of opinion among industry participants? I would disregard the opinion of anyone without a graduate degree, as I do on all topics.
  • spacebunny
    "I would disregard the opinion of anyone without a graduate degree, as I do on all topics."

    Because the only people whose views matter are those who can afford an advanced degree. And knowledge and intelligence only exist if recognized by the appropriate Ivy League authorities.
  • Eric H
    Yes, as Matthew has discovered, posting nonfalsafiable counterfactuals can be fun and easy. For example, I believe that absent policies that encourage home ownership, TARP would not have been necessary.
  • I don't know if TARP was necessary, and someone much smarter than I am will likely come up with a scenario showing the financial industry was much more resilient than anyone could/would admit, and that TARP was a giant, expensive bandaid which didn't address fundamental problems, like big banks having too much political power, which only a free market adjustment can resolve.

    My instincts tell me that TARP was a protection act to maintain government/corporate enmeshment, and that the smaller and medium size banks were prevented from rising to the occasion. My instincts are certainly fallible, but I still believe what was done was a statist reaction rather than a free market realignment which would have dealt with fundamental problems.
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