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Saturday, April 02, 2011

Annie Lowrey on TARP
TARP did stabilize financial institutions, helping—along with the Federal Reserve's emergency-lending programs, the stimulus bill, and other Treasury programs—to avoid economic catastrophe. Moreover, it did so at no cost. When TARP first arrived on the scene, the Congressional Budget Office anticipated its price tag at $300 billion. This week, TARP's bank programs actually moved into the black. When all is said and done, taxpayers stand to make about $20 billion.


So maybe we cannot agree whether TARP was a success or a failure.

TARP helped us avoid economic catastrophe and cost nothing, so maybe we can't agree if it was a success or a failure. Huh ?

The deleted part notes that HAMP failed totally and asserts that TARP "reduced moral hazard." She clearly means "increased moral hazard." The confusion of "increased" and "reduced" is not the only sign that Lowery doesn't understand the concept of moral hazard. The banks paid their debts or went bankrupt. Their creditors didn't all pay the banks. This does not create moral hazard for the banks. There is moral hazard -- bank shareholders were robbed blind by their crooked employees. There is continuing moral hazard, the suckers are still letting the crooks pay themselves bonuses. But the problem isn't that the Treasury made profitable deals.

It isn't as if banks are enthusiastic about the chance to send another $ 20 billion to the US Treasury.

I do have a problem with TARP. Why doesn't the Treasury do something like TARP all the time ? TARP was implemented to avoid economic catastrophe. The secretary of the Treasury was a former Goldman Sachs CEO. He gave the banks an very generous deal. And the Treasury still made money. The reason is that bearing risk is generously rewarded. The US Treasury shouldn't be risk neutral of course, it should seak to bear risk -- such risk bearing is an automatic stabilizer. The only reason that it doesn't invest in risky assets is because, if it did, it would drive Wall Street out of business.

To me that is the most attractive feature and not a bug.


Main Street Muse said...

I REALLY REALLY hate it when people today point to TARP's profitability. They're looking through that same stupid short term lens that made TARP needed in the first place.

Back when all was collapsing in September 2008, one of Paulson's brilliant moves back in September 2008 was to toss out a sky-high figure into the air - $750 billion - as absolutely essential to save America. In his book, he acknowledged it was a figure pulled out of thin air.

Now since TARP cost less than $750 billion, it's "cheap."

However, the cost of TARP is far more massive than the actual loans to the banks. We paid dearly for that profit - with the collapse of our economy.

The umbilical cord running from the US government to the banking sector has not been cut. Our bankers know they can risk whatever they want because they know without a doubt their Uncle Sam will hand over the money they need to get out of whatever scrap their risk-focused adventures got them.

Robert said...

Dear MMM

Unsurprisingly, I'm not convinced. I really don't see how my enthusiasm for government purchases of risky assets could be due to "looking with a stupid short term lens." In fact the case for investing in risky assets is that over the long term their returns dominate safe assets. It is absolutely a fact that the case for the policies which I advocate (in this post and elsewhere) begins with the claim "when deciding where the social security administration should invest, we should look at returns over long periods."

Also a basic principle of reasoning is pre hoc ergo non propter hoc (I don't know Latin but I'm trying to type "if even A happened after B, then it didn't cause B". The depraved idiotic insanity of financiers had huge costs, but that idiocy was *not* caused by TARP.

Your claim is that the cost of TARP is the cost of future crises caused by bnakers beliefs that the Fed and the Treasury will save them. That claim may be accurate, but you can't count the costs of the pre-TARP crisis as an effect of TARP.

I certainly agree that a tougher bargain with the bankers would have been better not just to take money from rich people who obtained private wealth in exchange for destroying national wealth, but also to deter them from doing it again. Notice I said the bankers.

There is a particular reason for my interest in the huge benefits and 0 cost of TARP (except for HAMP which was supposed to have huge benefits and large costs and instead had small benefits and cost only 25 billion because of deference to bankers who like to foreclose).

I want the government to bear risk. Part of the reason is that this will crowd out the private financial services industry. They can't compete with the Treasury, because the Treasury is more credit worthy (according to the market).

Private speculators can be driven out of the market for risky assets by the Treasury (or the Fed or the social security administration). This would hurt the banks not principally because of their role as such speculators but because speculators who don't work for hedge funds or investment banks (especially including pension fund managers) are fools easily separated from their money.

Government risk bearing would reduce the big anomaly (the insane equity premium and smaller but nonsensical quality premium on corporate bonds) which makes it possible for fools to do OK compared to cowards. Fools or cowards are the options open to principals chosing fund managers. I want them to choose cowards, because that would stare Wall Street.

YOu think my dream of starving Wall Street shows that I don't know about the huge costs it imposes on the real economy. But my motivation is the opposite of what you imagine.

Main Street Muse said...

To Robert,

First, I fully acknowledge that I look at this crisis as a resident of "Main Street" not as an economist. That said, I do not believe TARP stabilized our financial system. It instead absorbed the losses of the banks, while simultaneously rewarding terrible business practices of the bankers with rather large bonuses.

To me, this will likely lead to great instability within that sector - and for our economy.

Nor do I think that TARP is "profitable." There are far too many costs associated with TARP (i.e. The Great Recession, wage stagnation, high unemployment, high under-employment, massive debt at all levels of government, ongoing failures of regional and local banks deemed not TBTF, etc.) to make TARP a profitable venture.

To view TARP as profitable requires looking through that very short lens, rather than taking a big-picture view of what really happened. (That's what I mean by looking through that short lens - not your "enthusiasm for government purchases of risky assets." Though I confess, I'm hazy on how that works to our benefit as a country.)

That our financial sector required $300 billion to "stabilize" - and remains vulnerable to a similar catastrophic run on our banks, which would require a similar bailout - is further proof that TARP's "profit" is something we simply cannot afford ever again.

I would love to starve Wall Street of ill-gotten gains. However, I do not want that to happen through the assumption of more risk on the part of our government. I don't think our government can afford to take on more risk these days.

I guess I view that these days, the post-TARP federal monies are something that need to focus on investment security (not securitization.) And investment to me is investing in education and infrastructure, not in a large bonus pool for bankers who really sucked at their jobs.