TARP Didn’t Work

Statue of President George Washington in Wall Street, New York, December 23, 2008 (Natasja Valentijn)
Statue of President George Washington in Wall Street, New York, December 23, 2008 (Natasja Valentijn)

Three weeks ago, while announcing the Financial Crisis Responsibility Fee, President Barack Obama described the Troubled Asset Relief Program (TARP) as “a distasteful but necessary thing to do.” Although most of the money had been recouped already, the administration promised to get back “every single dime” the banks owed the American government.

A few days later, Nicole Gelinas, author of After the Fall: Saving Capitalism from Wall Street — and Washington (2009), warned that punishing banks won’t work so long as bondholders are convinced that “the government will bail them out again the next time they screw up.” TARP, in this sense, was a mistake.

Special Inspector General Neil M. Barofsky seems to agree in his Quarterly Report to Congress (PDF) of January 30. The TARP watchdog dreads the very mentality Gelinas described while concluding that “even if TARP saved our financial system from driving off a cliff back in 2008, absent meaningful reform, we are still driving on the same winding mountain road, but this time in a faster car.”

Unlike so many in Washington, Barofsky remembers where the recession started.

To the extent that the crisis was fueled by a “bubble” in the housing market, the federal government’s concerted efforts to support home prices […] risk re-inflating that bubble in light of the Government’s effective takeover of the housing market through purchases and guarantees, either direct or implicit, of nearly all of the residential mortgage market.

Many of TARP’s stated goals, notes Barofsky, “have simply not been met.” Both businesses and consumers continue to struggle with the finding of loans while a TARP program designed specifically to address small business lending, although announced in March 2009, hasn’t been implemented by the Treasury Department as of yet.

Notwithstanding the fact that preserving home ownership and promoting jobs were explicit purposes of the Emergency Economic Stabilization Act of 2008 (“EESA”), the statute that created TARP, nearly 16 months later, home foreclosures remain at record levels, the TARP foreclosure prevention program has only permanently modified a small fraction of eligible mortgages, and unemployment is the highest it has been in a generation.

Barofsky doubts that the aforementioned objectives “can effectively be met through existing TARP programs” but the reality is much simpler than that — these objectives cannot be met effectively through any government program. Whether Congress will draw the same conclusion or consider his report all the more reason to pass further regulation remains to be seen however.

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