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Could Obama have played TARP better?

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Sunday was the second anniversary of TARP, the wildly successful, wildly unpopular bailout program that saved the economy while destroying the careers of a good number of the legislators who voted for it. Noam Scheiber asks the obvious question: Could it have been different?

Scheiber bats around ideas for including tougher regulations on executive pay and turning a cold shoulder to the whining of AIG's executives, but eventually concludes that changes on the margins wouldn't have much mattered. I agree with that.

But I don't agree that nothing could've been done. I've long argued that the most serious political mistake the White House made was not doing financial regulation first. The banks had just been bailed out, and the public hated it. They wanted that money to carry not just strings, but ropes: Wall Street should've been punished for doing this to us, and its business reformed so that this never happened again. This should've been like an angry parent bailing a kid out of jail. The bailout happens, yes, but life isn't going to be the same for the kid afterward.

The administration has good arguments for why it waited on financial reform. For one thing, Treasury was still understaffed, and simply dealing with the ongoing financial crisis was an overwhelming task. For another, the financial system was fragile, and a huge new regulatory effort could've knocked them further off-balance and delayed the recovery.

And on some level, I'm not really contesting either point. But it was in that moment, when the banks got so much while being asked for so little, and then turned around and began demanding bonuses and lobbying Congress, that TARP became politically unsalvageable. It became clear to people that the political system was afraid of Wall Street, and that meant that the financial regulation bill that came later wasn't going to be tough enough, and that the banks would never properly pay for what they'd done. They were probably right about that.

Photo credit: Susan Walsh -- Associated Press

By Ezra Klein  | October 4, 2010; 12:37 PM ET
Categories:  Financial Regulation  
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[T]he refusal of FRBNY and the Federal Reserve to use their considerable leverage as the primary regulators for several of the counterparties, including the emphasis that their participation in the negotiations was purely "voluntary," made the possibility of obtaining concessions from those counterparties extremely remote. While there can be no doubt that a regulators' inherent leverage over a regulated entity must be used appropriately, and could in certain circumstances be abused, in other instances in this financial crisis regulators (including the Federal Reserve) have used overtly coercive language to convince financial institutions to take or forego certain actions. As SIGTARP reported in its audit of the initial Capital Purchase Program investments, for example, Treasury and the Federal Reserve were fully prepared to use their leverage as regulators to compel the nine largest financial institutions (including some of AIG's counterparties) to accept $125 billion of TARP funding and to pressure Bank of America to conclude its merger with Merrill Lynch. Similarly, it has been widely reported that the Government, while arguably acting on behalf of General Motors and Chrysler, took an active role in negotiating substantial concessions from the creditors of those companies.

Posted by: johninflorida | October 4, 2010 12:45 PM | Report abuse

"bailout program that saved the economy"

That sort of assumes that correlation equals causality, doesn't it?

Is it definitive that without the government stepping in, everything would have actually collapsed?

Posted by: Kevin_Willis | October 4, 2010 12:46 PM | Report abuse

from Valukas' Report:

The SEC knew that Lehman was reporting sums in its reported liquidity pool that the SEC did not believe were in fact liquid; the SEC knew that Lehman was exceeding its risk control limits; and the SEC should have known that Lehman was manipulating its balance sheet to make its leverage appear better than it was. Yet even in the face of actual knowledge of critical shortcomings, and after Bear Stearns’ near collapse in March 2008 following a liquidity crisis, the SEC did not take decisive action .

Crony Capitalism for Me, but not for thee! Heckuva job, NY Fed President Timmeh!

Posted by: johninflorida | October 4, 2010 12:53 PM | Report abuse

More of the same out of touch unqualified appointees joined the Federal Reserve today. The President obviously favors academics and bureaucrats totally lacking in either or both of macroeconoic educations or real world experience. Those without macroeconomic educations and those who have never had to worry about a paycheck may be fine people with time to be political activists but they certainly are not qualified to make monetary policy at a time when tens of millions of Americans have lost their jobs, homes, families and savings. The most charitable thing one can say about the federal reserve is that it has failed. Where else could one find macroeconomic policy makers so naive they set the interest rates banks charge and think banks will loan money for months and years if they can borrow it at a low interest rate for 24 hours at the one and only interst rate banks set? where else but the Fed could find macroeconomic policy makers so naive they think banks will loan money if they have more reserves in excess of what these naive people require - the banks think they need to hold more liquidity so the FDIC won’t take them over. The Federal Reserve does not understand that and so has kept the banks short of loanable reserves for several years. Enough. the president needs to take some resignations and appoint qualified people, people with appropriate educations and experience. The present batch does not come close.

Posted by: JohnLindauer1 | October 4, 2010 12:58 PM | Report abuse

Today was the aniversary of a "wildly successful TARP?" What world are these people living in? TARP spent hundreds of billions to bailout a thousand or so of the partners in financial firms that gambled and lost in derivatives and a few thousand UAW members who might have otherwise lost thier jobs. But it totally ignored the tens of millions of people who have lost their jobs, homes, and businesses. Other than pundits and bureaucrats inside the beltway who could be so naive as to think banks would loan money for months and years if the Fed would lower the rate of interest at which the banks could borrow the money for 24 hours? Who else would be naive enough to think banks had enough reserves and could/should be loaning them out when the banks themselves think they need to hold more reserves and are being encouraged by the FDIC to do so in order to avoid being closed? The Federal Reserve has failed because its members and those who write about them do not have sufficient educations in macroeconomics and/or are totally lacking in real world experience. Our recession could have been ended initially by letting the gamblers fail and extending deposit insurance to all deposits and CDs than TARP and today it could be ended by increasing the liquidity of banks - its called the Federal RESERVE, not the Federal Overnight Interest rate, for a reason. The President needs to accept a lot of resignations in a hurry if he is not to follow President Hoover into oblivion in the next election.

Posted by: JohnLindauer1 | October 4, 2010 1:12 PM | Report abuse

The failure of the Bankruptcy Mortgage Modifcation (aka cramdown) and the ongoing foreclosure crisis while the banks are doing fine plays into this as well.

Especially given the recent news that the foreclosures are being executed improperly.

Posted by: jnc4p | October 4, 2010 1:37 PM | Report abuse

Agreed, Ezra.
If I had to use one word, it would be: bonuses.
The public sees Obama as having given Wall Street a trillion dollars so the failed banksters could keep their obscene bonuses, even after having destroyed the country.
Not a true interpretation, but Obama and Co are idiots for not having seen it coming.

Posted by: AZProgressive | October 4, 2010 1:44 PM | Report abuse

These are worth rereading.

I would argue that the purpose of TARP wasn't to "save the economy" but rather to "save the financial system" which may have been necessary, but wasn't sufficient to save the economy.

Posted by: jnc4p | October 4, 2010 1:59 PM | Report abuse

TARP basically stopped the run on the banks. Do people still believe if the likes of Citigroup, Wachovia, Washington Mutual, Merrill Lynch (plus hundreds of smaller regional and community-based banks) went bust that our country would be better off today?

Posted by: tuber | October 4, 2010 2:08 PM | Report abuse

"Is it definitive that without the government stepping in, everything would have actually collapsed?

Posted by: Kevin_Willi"
That's pretty much the consensus around economists worldwide. Remember, storied financial institutions, some over 100 years old bit the dust. There was a point where nearly every single investment bank in America had perished. The damage so deep that we are still seeing the effects of that debacle today.

In the end it will cost the tax payers about $50b, a small price to pay considering the consequences.

It was managed very well by the Dem administration compared to the original plan by Paulsen/Bush which gave an open check with zero accountability.

BTW: How do Sarah's fans feel about her supporting TARP?

Posted by: JRM2 | October 4, 2010 2:49 PM | Report abuse

"For another, the financial system was fragile, and a huge new regulatory effort could've knocked them further off-balance and delayed the recovery."

There were ways to deal with all of this. Just have a bigger fiscal stimulus to compensate, and more monetary stimulus and lending of last resort from the Fed.

But, of course, like most things that are positive for this country and the world you have to get it by the Republicans, and Obama had to deal with that.

Posted by: RichardHSerlin | October 4, 2010 4:00 PM | Report abuse

"There were ways to deal with all of this. Just have a bigger fiscal stimulus to compensate, and more monetary stimulus and lending of last resort from the Fed.

But, of course, like most things that are positive for this country and the world you have to get it by the Republicans, and Obama had to deal with that."

Well that's interesting, as it was Bush who signed tarp, and requested Obama's half of TARP for him.

Posted by: krazen1211 | October 4, 2010 5:28 PM | Report abuse

TARP should have been confined to institutions that held federally insured deposits (no auto companies, no insurance companies, no foreign banks, no investment banks, etc.) and the banks' shareholders and bondholders and other creditors (including employees with big bonusus payable) should have been wiped out before a penny of taxpayer money was spent.

Posted by: bgmma50 | October 4, 2010 6:21 PM | Report abuse

Hopefully we won't be as gullible next time around. And there will be a next time, since the fundamental problems of unpayable debt and deflated asset prices that led to the crisis to begin with have not been resolved.

Posted by: bgmma50 | October 4, 2010 6:24 PM | Report abuse

And just why, pray tell, does TurboTax Timmy continue to roll over on cue for AIG?

Posted by: bgmma50 | October 4, 2010 6:26 PM | Report abuse

Get information on how to reduce your debt by filing for bankruptcy

Posted by: rebecatoby05 | October 5, 2010 5:02 AM | Report abuse

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