Friday, September 17, 2010

In Defense of TARP

I've been making the case for TARP for a long time, not that I have some brilliant insights on TARP but because I've read a lot of papers explaining its necessities and those articles that criticized focused mainly on how to make it more effective or more comprehensive. I've never read or heard an argument that explains how doing nothing would have been better.

So, it amazes me why its so unpopular now.

Well, its been two years to the week of the TARP, here's some literature looking back:

Matt Yglesias:

"TARP was both a good idea and nothing less than an exposure of the myth of the free market. There’s an idea out there about a free market that operates “naturally” and produces a certain distribution of wealth and income. Any further interventions into that marketplace to ensure that prosperity is broadly shared constitutes some kind of illegitimate “redistribution” of wealth and income from its natural state. This is not, however, an accurate description of how any economy featuring a modern banking system works. A world in which we simply didn’t have banking and finance would be, overall, a much poorer world. But a world with banking and finance requires various forms of management—monetary policy, regulation of the financial system, and intervention amidst panics and crises. TARP and the associated activities of the Federal Reserve were examples of such intervention and were good ideas. But they highlight that public policy decisions are integral to the creation and sustainment of modern capitalist economies."

Karl Smith:

" If no one else will defend TARP, I will defend it. I will defend it through any medium, at anytime, under any circumstances. I will be the lone voice in a town hall full of Ron Paul supporters. I will say it at a Code Pink Regional Conference. I will not let this go.

There are few moments when I have shed a tear over policy. Despite initial missteps what I saw was lawmakers coming together in the face of overwhelming public opposition to protect the future of our society. It made me more confident in our government than any other single event I have ever experienced."

Ben Smith:

"Rammed through Congress in the final months of the Bush administration by a political and financial establishment that felt it had looked into the abyss, TARP had the support of not just President Barack Obama but also his likely foes in 2012, such as former Govs. Mitt Romney and Sarah Palin. But it has been only sporadically defended, or even explained, by leaders of both parties who have shown decidedly little courage of their convictions."

'It’s become demonized on the left and the right by screamers — Glenn Beck and Rachel Maddow — who have no interest in the facts; they’re just interested in hyperbolizing and generating attention,' lamented New Hampshire Sen. Judd Gregg, a key player in guiding the measure through the upper chamber and one of the few Republicans willing to talk about TARP in positive terms."

"While Obama last week made reference to having narrowly avoided another Depression, he and other leaders have generally avoided trying to explain that mechanism, in favor of trying to change the subject.

All that, despite a broad consensus of economists who think things would have been worse without the bank rescue — and perhaps far worse: In one simple example, American workers’ paychecks might well not have arrived. Think bread lines and cat food.

“The TARP is probably the most effective large-scale government program that the public has vehemently decided was a bad idea, and, therefore, has only the most tepid political defenders,” said the Brookings Institution’s Douglas Elliott. “Unfortunately, the right thing to do for the public just sounds so wrong to Main Street in this case.”

The policymakers who emerged shaken from a Sept. 16, 2008, briefing by Treasury Secretary Henry Paulson never managed to win credit for the apocalypse avoided from an American public furious at them for allowing the mess to develop in the first place."

"A study this summer by former Fed Vice Chairman Alan Blinder and Moody’s chief economist Mark Zandi was representative of that consensus. They projected that without federal action — TARP and the stimulus — America’s gross domestic product would have fallen more than 7 percent in 2009 and almost 4 percent in 2010, compared with the actual combined decline of about 4 percent.

“It would not be surprising if the underemployment rate approached one-fourth of the labor force,” they wrote of their scenario. “With outright deflation in prices and wages in 2009-11, this dark scenario constitutes a 1930s-like depression.

Back in 2008, that view was persuasive. Republicans like McConnell and Blunt swallowed their distaste for government action and persuaded their colleagues to vote with them for TARP. Liberals like House Speaker Nancy Pelosi and Massachusetts Rep. Barney Frank swallowed their dislike of Bush and distrust of the bankers."

Ok, just read this whole article..

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