TARP saved the banking system, but failed at everything else

tarp-saved-banking-system-but-failed-at-everything-else-expertOn the same day the Obama Administration floated a trial balloon to test the waters for extending TARP, the Congressional Oversight Panel heard from experts about TARP's effectiveness. While some of the experts did find aspects of TARP effective, they all testified to significant problems with TARP and the way it was implemented.

Chairwoman Elizabeth Warren set the tone for the hearing, saying that while the Troubled Assets Relief Program had succeeded in preventing a "catastrophic collapse of the financial sector," it was not "designed really to rescue large banks. The broader long-term goals were aimed at strengthening the overall economy and dealing with the alarming number of mortgage foreclosures." How successful was TARP in meeting these larger goals? Not very.
Here are the reasons Warren believes TARP failed to meet these larger goals:
  • Uncertainly persists about the stability of our financial institutions and whether they can survive without the benefit of government guarantees.
  • The home foreclosure crisis continues largely unabated.
  • Unemployment is now at 10.2 percent
  • More than 100,000 families are filing for bankruptcy each month
And when it comes to changing the culture on Wall Street, Warren went on to say, "TARP has failed to check the kind of excessive risk-taking that brought on the crisis, while it has created price distortions and moral hazard in the market place. The rules of the financial road -- the inadequate and wrong-headed regulations and laws that headed us straight into the crisis -- remain unchanged."

Warren promised that the December oversight panel report would "contribute to a public debate" about the scheduled expiration of TARP at the end of 2009, and whether the program should be extended. Treasury Secretary Timothy Geithner can extend the program through October 2010 without additional action by Congress, as long as he notifies Congress of his intent.

"No Easy Way to Determine the Importance of TARP Funds"

Alex Pollock of the conservative American Enterprise Institute strongly called for the end of TARP. He testified, "It is easy to imagine how much the Treasury and the Administration would like to extend as long as possible the power and independent capacity they enjoy through the operation of TARP. But in my view, it is time to observe its target expiration date of Dec. 31, 2009." He believes government crisis-intervention programs must be kept temporary and "not be allowed to morph into permanent economic distortions."

Dean Baker, co-director of the progressive Center for Economic and Policy Research, told the panel, "There is no easy way to determine the importance of TARP funds in stabilizing the financial system. Clearly, the TARP did play a role in stopping the panic that was driving the financial markets last year." But, he noted, actions by the FDIC and the Fed contributed as well. The money made available through the Fed and the FDIC was considerably larger.

Baker added that the "relevant question is whether the TARP, along with the other programs put in place, restored stability in a way that best served the real economy and also can be viewed as fair by the American people. By these criteria, the TARP does not score well." His biggest problem with TARP is that it was not carried through in "ways that led to more broad-based benefits to society and also directly transformed the financial system, instead of restoring and reinforcing its existing structure."

Baker believes the "country is paying an enormous price for its dysfunctional financial system." He believes the loss from the current downturn will be close to 40% of GDP or about $6 trillion and that "there is little reason at this point to believe that serious reforms will occur."

As to how TARP stacks up on its broader economic goals, Baker said, "TARP was approved with promises to ensure that homeowners would be allowed to stay in their homes and also that executive compensation in the bailed out banks would be restrained. It failed miserably in both areas."

Cost of TARP Will Be Lower Than Predicted, Says Zandi

Mark Zandi, chief economist and co-founder of Moody's Economy.com, testified that the most effective use of TARP funds was to "provide capital to the banking system during the height of the financial panic." He believes, "The financial system would not have stabilized without this help." But, he added, "TARP has been the least effective in stemming the foreclosure crisis and stopping the crash in house prices. Efforts to jump-start small-business lending have also been largely unsuccessful."

Zandi expects TARP to ultimately cost the taxpayers about $100 billion to $150 billion, far less than the original $700 billion price tag. He expects the most costly part of TARP will be the bailout of the automotive industry, which he thinks will total $50 billion. He thinks AIG will cost taxpayers up to $35 billion. Also part of the TARP price tag will be $30 billion to support the housing industry. The Capital Purchase Program, which provided capital to financial institutions, will ultimately cost between $10 billion and $15 billion, while other TARP credit programs will reach costs of about $10 billion. He also thinks about $5 billion will be lost on small-business lending.

But that's just a very small piece of what Zandi estimates will be the total direct costs of the financial panic and the great recession. He expects that cost to total $1.2 trillion, and he includes a table in his testimony to prove that number. Most of the costs beyond TARP related to the fiscal stimulus packages of early 2008 (Bush administration) and early 2009 (Obama administration), which together will cost the taxpayers $900 billion. Add to that the nearly $750 billion in indirect costs resulting from the weaker economy, says Zandi, and the loss from this recession reaches nearly $2 trillion, or 14% of GDP. The savings and loan crisis of the early 1990s had a much smaller price tag -- $350 billion in today's dollars, which was equal to 6% of GDP at that time.

You didn't find any TARP lovers at this hearing. While all agreed that it contributed to stemming the financial panic, they also agreed it fell far short of its long-term goal of strengthening the overall economy.

If the administration believes more help is needed to stabilize the U.S. financial system, it should not attempt to provide it through the extension of this rapidly and poorly designed program. Instead, the administration should seek approval for a new program that is better designed to get us out of this crisis and correct the problems that got us into this mess in the first place. By now, there should be enough knowledge and experience to develop legislation that better meets the country's future financial needs. We should not continue on this poorly designed path.

Lita Epstein has written more than 25 books, including Reading Financial Reports for Dummies and Trading for Dummies.
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