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Two economists say in new paper that TARP worked

And the model says that what we did this time broadly worked. In particular, it says the financial rescue worked. In other words, George W. Bush, Hank Paulson and Ben Bernanke deserve some credit for what they did in the immediate aftermath of the crisis.

Zandi: Absolutely! I think TARP was incredibly important. The mistake was for Congress to vote it down initially. That eviscerated confidence and took the equity market down to a whole other level and exacerbated our problems. By that time, the damage was so serious that the intent of TARP had to shift. Originally, it was about buying bad assets, which would've been more graceful. But because of the "no" vote and the damage it did, they had to make TARP a source of capital for the financial system. The capital purchase program was ultimately the one key thing that was necessary for stabilizing the financial system and the economy.

So why is TARP so horribly unpopular then?

Blinder: People feel it was successful in ways they're not happy with: That is, the bankers are making a lot of money now. That part of the bailout cost the government less than nothing, as the government is turning a profit on it. But in some moral sense, these bankers did not deserve to be saved. The problem was that if they went down with the ship, we were going down, too. The right way to think about the banker benefits was collateral damage in a war to save the economy. Had we not done that, things would've been horribly worse for everybody. So I don't hesitate. To me, it's not close.

Do you think it was well-designed?

Blinder: TARP should've come with more strings attached -- a lending requirement, for instance. If banks were going to get this money, they should've had to lend with it. I would've put restrictions on banks' ability to pay dividends, and tougher restrictions on executive pay. I also think it was a very big mistake for Secretary Paulson to force this money on banks that didn't want it. I can hardly say his theory without laughing: He wanted to reduce the stigma of taking it. The market knew who was strong, and the strong banks, like JP Morgan, went to the media and loudly said that the government is forcing this down our throats.

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