It isn’t often that the government launches a major program that achieves its main goals at a tiny fraction of its estimated costs. That’s the story of TARP — the Troubled Assets Relief Program. Created in October 2008 at the height of the financial crisis, it helped stabilize the economy, using only $410 billion of its authorized $700 billion. And most of that will be repaid. The Congressional Budget Office, which once projected TARP’s ultimate cost at $356 billion, now says $19 billion. This could go lower.
You would hardly know.
Almost everyone loves to hate TARP. It’s a favorite political sport of liberals, conservatives, Republicans, Democrats — and the public. A Bloomberg poll last October asked how TARP had affected the economy. Forty-three percent of respondents said it weakened the economy; 21 percent said it made no difference; only 24 percent said it helped, with 12 percent unsure one way or another. Commentators in newspapers from the Wall Street Journal to the New York Times disparage TARP.
One lesson of the financial crisis is this: When the entire financial system succumbs to panic, only the government is powerful enough to prevent a complete collapse. Panics signify the triumph of fear. TARP was part of the process by which fear was overcome. It wasn’t the only part, but it was an essential part. Without TARP, we’d be worse off today. No one can say whether unemployment would be 11 percent or 14 percent; it certainly wouldn’t be 8.9 percent.
That benefited all Americans. TARP, says Douglas Elliott of the Brookings Institution, “is the best large federal program to be despised by the public.”
The source of outrage is no secret. Bankers are blamed for the crisis and reviled. The bank bailout — TARP’s first and most important purpose — was instantly unpopular. Most Americans, says Elliott, “believe that taxpayers spent $700 billion and got nothing in return.”
What this ignores — aside from being factually incorrect — is that an alternative being promoted at the time was widespread nationalization of banks. The cost would have been many times higher; the practical problems would have been enormous. As it was, TARP invested $245 billion in banks(and about $165 billion into the other programs). The extra capital helped restore trust. Meanwhile, the Federal Reserve increased its lending; the Federal Deposit Insurance Corp. guaranteed $350 billion of bank borrowings. Banks resumed dealing with each other because they regained confidence that commitments would be honored.
Of the $245 billion invested in banks, the Treasury has already recovered about $244 billion, including interest payments, dividends and cash from sold bank stock warrants. So the bank rescue has roughly broken even. When TARP’s remaining bank investments are closed, the Treasury expects an overall profit of about $20 billion.
Almost all of TARP’s activities have been distasteful. This was surely true of the rescue of General Motors and Chrysler. But the automakers’ collapse would clearly have worsened already dismal unemployment. Did we really want these companies to shut down, with some plants sold to foreign automakers? Of the $80 billion committed to the auto rescue, the Treasury now expects to recoup about $65 billion. The government still owns about 33 percent of GM and 9 percent of Chrysler. By contrast, the sale of its 92 percent stake in AIG, the insurance giant, might yield a small profit.
We need to remember that TARP was a desperate program for desperate times. It’s had its failures: The Obama administration’s forecast that it would provide mortgage relief to 3 million to 4 million homeowners has fallen well short (the current number is about 600,000). But the larger purpose of helping calm financial markets succeeded. Costs have been lower than predicted because aid was extended at the panic’s height, when expectations of losses were greatest. As the economy has recovered, the gloomiest predictions proved exaggerated.
Some TARP critiques reflect desirable oversight by Congress, the Government Accountability Office and a special Treasury inspector general. But some criticisms are broad generalities that, on inspection, are highly suspect. One common allegation is that TARP will encourage more reckless risk-taking because big financial firms know they’ll be bailed out if their gambles backfire — a problem economists call “moral hazard.” Bankers keep profits but are protected against losses, which are assumed by the public.
This is a serious issue, but TARP’s legacy is actually the opposite. During the crisis, investors in banks and financial institutions suffered huge losses. It wasn’t predictable which institutions would survive and which wouldn’t — or on what terms. The same would be true in the future. Indeed, TARP’s extreme unpopularity compounds uncertainty, because it suggests that politicians will recoil from more bailouts. The moral hazard is more imagined than real.