In 2008, in the midst of massive economic turmoil, Congress passed the Troubled Asset Relief Program, or TARP, in hopes of sparing the economy from what many viewed as a near certain collapse. Since then, TARP, which funneled hundreds of billions of dollars into the coffers of the nation’s biggest banks, has become a symbol of both Washington’s overspending and its corporatist leanings. But while popular sentiment has hardened against the law, elite consensus has come to embrace it as a resounding success. Last fall, Politico’s Ben Smith called it “a success none dare mention” and Washington “insiders’ finest moment, a successful attempt to at least partially fix their own mistakes.” Earlier this week, Washington Post columnist Robert Samuelson, a frequent critic of government intervention in the economy, echoed the sentiment that TARP was a success, writing that the real lesson of the program is that “only the government is powerful enough to prevent a complete collapse.” Many of the law’s supporters pointed to a recent report by the Congressional Budget Office stating that despite the initial $700 billion price tag, the cost to taxpayers would only amount to about $19 billion.
I’ve been tempted by these arguments myself. It’s not that I ever thought TARP was a great idea or an experiment worth repeating. Clearly there were serious problems with the Treasury Department’s claims about the program’s effects. But ultimately, TARP seemed like a lesser problem—a relatively small expense that may even have had some short-term positive effects.
Garett Jones, a professor of economics at George Mason University, has spent the last two years arguing otherwise. I spoke with him earlier this week about the why he blames TARP for much of America’s economic struggles, and why its long-term consequences could be more serious than most people realize. What follows is an edited version of our conversation.
Reason: The elite consensus seems to be that TARP was actually a pretty successful program. Even market-oriented economists like Bob Samuelson have defended it. I know you disagree. Why are they wrong? Why was it a bad idea?
Garett Jones: There are a few reasons. Normal economics tells me that when the government takes over an industry, it’s bad. Normal economics tells me that government takeovers lead to bad performance. And we actually have a lot of evidence on this. Government-owned banks are associated with much worse economic outcomes around the world. That doesn’t mean the banks failed. Auto industries in the Soviet Union never went into bankruptcy. But that also doesn’t mean that they were good.
What’s going on here instead is that the market looked at TARP and said, “Wow, our financial system is going to be a lot worse—a lot less productive—than we thought.” That’s a major reason, I think, why the stock market collapsed after TARP was enacted. The market had looked at bad economic news about mortgage markets, about financial markets, for a good solid year beforehand. And it took the passage of TARP for it to completely tank.
I’m willing to be pretty bold about this. There really wasn’t much new economic news about the state of the banks that came out when the stock market had its eight days of terror. What was coming out was the government's ever-growing willingness to completely take over and micromanage the “too big to fail” banks.
Reason: So you would say that at least the primary cause of the crash was TARP and the government showing itself to be willing to be intervene?
Jones: I think there’s a solid shot that it’s most of it. It’s at least a substantial part of it. I know that I’m in the minority here. It’s just me and John Taylor right now who are willing to say this openly.
But yes. The news that still doesn’t get enough attention is that the collapse happened after TARP was passed, not before. People have this story they tell each other where the economy was collapsing so we passed TARP. It’s closer to the truth to say the opposite.
Reason: When people talk about TARP, when they justify it, they say it was necessary because the alternative was to face a crisis—or at least a very high risk of a crisis.
Jones: Exactly, yes.
Reason: Do you think we were in a crisis situation when TARP passed? And was there any other alternative. That seems to be a big part of the case: First, we were in a crisis. Second, there was no alternative.
Jones: I completely disagree. I said so at the time. I wrote my first words on it just a few weeks after TARP was enacted, and then I spun it out into a full length paper called “Speed Bankruptcy.” The basic story is the same story the Irish people are debating now. It’s the idea that you make bond holders share the pain. It’s called burden-sharing now. It took years to come up with a term to capture what you need to do when your banks are in the tank. And the answer is: You tell long-term bond-holders, “Sorry, you’re not going to get paid. You’re not going to get paid 100 cents on the dollar. You’re going to have to take a haircut.”
Reason: So your argument is that the lost money’s got to come from somewhere. And bondholders are the people who took the risk and therefore should face the negative consequences.