Rethinking TARP and the Arc of Obama’s Presidency

The events leading to the Troubled Asset Relief Program are dark pages for the United States. The massive extension and securitization of toxic bundled mortgages and subsequent rash of mortgage defaults and real estate foreclosures known as the subprime mortgage crisis had pushed its financial holding institutions up against the cliff. Treasury Secretary Henry Paulson and President George W. Bush structured and aided in the bill’s passing in September 2008. At the time there was a sense that the failing banks might be the first fall in a row of dominoes, the whole financial world. I have always seen TARP as a ventilator given to banks that had been asphyxiated by declining securities. Allowing the institutions to breathe again gave oxygen to the 2008 financial panic, slowing down its previously out of control heartbeat. Stabilizing our financial markets was one primary objective. The need to prevent a run on banks of disastrous proportions necessitated this drastic action; injecting $700 billion to insure troubled assets that were rotting away at the framework of our economic pillars. At the time it seemed like the objective of utmost importance. Ben Bernanke’s speech after the bill’s passing is representative of the goals; “increased liquidity and transparency in pricing will help to restore confidence in our financial markets and promote more normal functioning. With time, strengthening our financial institutions and markets will allow credit to begin flowing again, supporting economic growth.” Along with the Emergency Economic Stabilization Act of 2008, TARP attempted to construct a bulwark against the downward trajectory of subprime writedowns and fears of bank runs.

Since then defense and derision of TARP has been vehement on both sides. After more than three years perhaps it is wise to look back at all the provisions, failures, and successes of TARP. Clearly TARP stopped the out of control margin spiral. Whether those predicting the failure of the western financial system were right, we will never know or need to know. Despite our current malaise of problems, we were not plunged into a 21st century Great Depression. Nonetheless, Salam Reihan sees TARP as a “lazy, cowardly bailout.” Daniel Larson advocates this sentiment along with Reihan’s wish for a type of alternative plan pushed by Luigi Zingales; debt restructuring and a debt-for-equity swap that would impose consequences on the institutions who caused the subprime mortgage crisis. Yves Smith would also rather have seen a bill with such an objective, saying “What we need is debt reduction via restructuring and offsetting stimulus, but that means imposing losses on banks.” So three years later, it seems like the trade-off is ultimately between the injection of huge moral hazard into the banking system or the past possibility of monumental financial crisis. The treasury allowed the government a carte blanche mandate to fund TARP, unlike the current EFSF path of trying to win over private funds in a time of illiquidity and confusion.  Perhaps this was the wrong move, one that did not correct for the future.

Instead we have now moved past a TARP style bailout (not even telling of the shadowy TARP 2.0). Bailouts won’t come via a Congressional passed bailout, but one funded by the FDIC. Now Bank of America can move its most risky derivatives, credit default swaps, to depositories backed by the FDIC. The FDIC, which in turn is backed by the U.S. taxpayers. The case of Slattery v. U.S. which originated in 1982 and finally brought to a close in January this year, essentially thrusts taxpayers underfoot the FDIC. In the end the lowest on the food chain gets the boot.

We can couple the arguments over TARP’s effectiveness with President Obama and his ability residing over a stagnant economy and against a combative and stonewall GOP. His attempts at driving monetary policy failed as logged in Ron Suskind’s Confidence Men. Suskind characterizes the education of President Obama as one with a harsh learning curve. Ezra Klein, Matt Yglesias, Kevin Drum, and mainstream bloggers see Obama’s appointment of Ben Bernanke and Bernanke’s hesitation to pursue drastic action to help the American economy as a big mistake. If he had any cards in his ability to actually dent the banking industry’s well formed armor it could have been done through Federal Reserve appointments. Imagine if say, Charles Evans was stepping up to the plate instead of the wallowing Bernanke. We could be ardently following the dual mandate. But then again, any of Obama’s appointments slightly to the left of center left have been stopped by the Republican Party lockstep. President Obama has been timid in using aggressive tactics to out the acrimonious attempts to stall the economy long enough to gain back the White House. The tide may be turning now though, with half of Florida voters convinced that the Republicans are intentionally tanking the economy and Republican party members are even voicing their displeasure over party tactics. Even Bernanke seems to be getting more to the point with his speech calling for political help in boosting the economy.

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