Commentary: The Case of the Misunderstood Bailout
Currently, it's hard to find a federal program more unpopular than the Troubled Asset Relief Program (TARP), the bank "bailout" passed in the waning days of the Bush administration. Poll after poll shows that the public does not support the bailout, and politicians, especially ones up for reelection, have picked up on this trend and frequently denounce the program. And yet, by many objective measures, the bailout could be considered a success: it helped avert financial calamity, it will cost a fraction of its original estimates, and TARP’s bank provisions will likely end up earning a profit for the government. While TARP could have done better, the public perception that TARP failed is not consistent with most data.
The law creating TARP, the Emergency Economic Stabilization Act of 2008 (EESA), is an incredibly vague piece of legislation, mainly because Treasury officials, led by then-Secretary Hank Paulson, were worried that the nation’s economy was collapsing. Lehman Brothers had already imploded, others seemed likely to follow, and AIG, an insurance group with myriad financial ties throughout the economy, was teetering. Congress needed to do something and do it immediately to stabilize the financial sector. Thus, TARP gives the Treasury remarkable leeway in how to use bailout money. This can be seen in the fact that TARP actually involved very little purchasing of "toxic assets," despite the moniker of the program created by EESA: "Troubled Asset Relief Program."
While some argue that the Federal Reserve’s monetary efforts did more to prop up the economy in the long run, TARP unquestionably succeeded in the short run. No more large banks or investment houses collapsed, nor did AIG fail. Because of TARP, the nation did not descend into financial oblivion, saving the assets and retirement savings of millions of people.
At the same time, the bailout will not cost the widely publicized $700 billion figure. TARP had essentially three kinds of programs. The first was the support for banks, the Capital Purchase Program (CPP), which is one of the more well known provisions. The federal government basically loaned banks money in exchange for various forms of collateral, enabling banks to stay afloat in a time when few were willing to lend. Since federal support was in the form of loans, which had to be paid back, CPP cannot be considered a "handout." And because banks had to pay interest on the loans, the support could even be profitable for the American people. Thus far, 78 percent of bank recipients have paid back their TARP funds plus interest, which has provided the government with $27 billion in profit on those loans.
However, the other two parts of TARP will likely end up costing the taxpayers money. The second part of the money was spent propping up AIG, the international insurance giant, while the third part was spent on several other programs, including support for American car manufacturers and home mortgages. Estimates for the cost of both parts are uncertain. The Treasury Department has recently been hinting that AIG may earn a profit for taxpayers, but that is far from clear. The home mortgage modification program, however, was never intended to recoup its investment and will end up costing almost $50 billion, although it has only spent $500 million so far. Depending on how the stock market fares in the coming months, the government’s investment in automakers could end up costing somewhere less than $20 billion.
All in all, it looks like TARP will have cost taxpayers some $30 billion, far less than the $700 billion figure frequently cited (the $30 billion figure is a government estimate; the independent Congressional Budget Office, on the other hand, estimates TARP will cost about $66 billion).
The United States has long had a strong anti-Wall Street populist streak, so it is unsurprising that the bailout is disliked. Indeed, animosity over TARP is so bad that sitting members of Congress have already lost their jobs over their votes for the bill. The most prominent example of this is Sen. Robert Bennett (R-UT), who resoundingly lost a primary battle for his seat in May. However successful TARP may have been at averting economic calamity, popular enmity toward the program is not without reason.
TARP was riddled with shortcomings. Reuters financial blogger Felix Salmon wrote in a recent article that not only did the Fed’s monetary policy play a larger role in saving the nation’s economy, TARP failed to improve small business lending or improve the nation’s foreclosure crisis, despite the program’s stated goal of removing "toxic assets."
Another vocal critic of TARP, Dean Baker, a director at the Center for Economic and Policy Research, has frequently noted that, through TARP, the government was providing Wall Street firms with very low loan rates, losing a great deal of potential revenue while at the same time giving great benefits to the firms. Many other critics have decried TARP’s implied moral hazard, in that bailing out failing banks only encourages them to continue risky behaviors in the future.