The Volokh Conspiracy - Carping about TARP-ing.

Is TARP a fabulous success? No! But it isn't a failure, either. Look here, for example. The TED spread is a standard measure of financial confidence—roughly the amount of extra interest a bank needs to pay another bank to lend to it rather than to the U.S. government, which is (supposedly, anyway) super-safe. In normal times, it is around 0.5. During the height of the financial crisis, it was around 4.5. Now it's tad below 1. Other indicators are consistent with TED. The purpose of TARP was to unfreeze the credit system. If it is not yet fully liquid, at least it has melted a bit. Mission Accomplished, as President Bush might say.

You might say that the credit system would have thawed by itself and TARP was wasteful and unnecessary and did nothing but generate a tsunami of moral hazard that will crest in the future. You might say that TARP thawed the credit system but a cheaper, more modest program could have done the same. You might say that the improvement of the indicators will last only as long as the Fed and Treasury pull the strings on the marionettes. But you don't really know, do you? By the usual standards for evaluating government interventions, which is to say crummy standards, TARP has done okay. The safest thing to say is that it is too soon to tell, but by the same token it is too soon to tell that TARP has failed. Enjoy the good indicators (yes, while the real economy collapses around us, but that is another topic) and stop complaining.

So why all the carping? Congress, in its usual way, fulminates and snarls en route to its next disbursement of funds. Here are the criticisms, and some comments.

1. Treasury hasn't compelled the banks to use TARP money to make loans to consumers and businesses. Maybe, but there is a good reason for this. The banks are insolvent. They are using the funds to become solvent. If they were just to lend them out again, the banking system would not emerge from life-support.

2. Treasury hasn't compelled the banks to hold off on foreclosures. Maybe, but if the banks are insolvent or near insolvent, and they held off on foreclosures, then they would become even more insolvent. Holding off on foreclosures means giving up an asset or some portion of its value. Treasury probably believes that fixing the banking system should take priority over helping homeowners, many of whom should never have bought a house in the first place.

3. Treasury hasn't compelled executives to accept lower paychecks. Maybe again, but I suspect there are good reasons here as well. TARP doesn't give government any sticks; only carrots. If executives won't take pay cuts as a condition for receiving funds, then Treasury's only option is not to give the funds, which means not solving the banking crisis. Treasury has avoided wasting a lot of time that would be needed to achieve a largely symbolic and potentially harmful goal.

4. Treasury shouldn't have bailed out the auto industry. I like this argument better but the problem is that it is possible that giving money to the auto industry would help the financial system more than its next best use, such as giving the money to some other banks somewhere. The automakers have more debt than plenty of banks. Still, one suspects that the auto bailout was a stimulus measure, not a credit-thawing measure.

5. Treasury hasn't been "transparent" enough. Everyone likes transparency. But what would a transparent Treasury look like (nothing!)? It would say that we gave money to bank X rather than bank Y because X's balance sheet is a bit better (or worse), or it has better executives, or it has a lot of key assets, or some such thing. It might as well say that it consulted the entrails of a rabbit. These are judgment calls, and while it's always good to have more information, this additional information would just generate more disagreement among the critics. Okay, okay! More transparency, please!

6. Treasury has wasted our money. It will get much of it back, perhaps even a return on it, maybe even a higher return than we taxpayers have obtained through our private investments.

7. Treasury was supposed to use TARP funds to buy mortgage-related securities, not to purchase preferred stock in banks and other financial institutions (and automakers). But the statute authorized Treasury to do what it wanted with the funds, and although Treasury initially planned to use the funds to buy mortgage-related securities, it quickly realized that buying stock was a better way to revive the banking system. Well, good for them! They changed their minds when they were persuaded that their first idea was no good (though it may turn out to be good after all).

8. Treasury should have exerted more control over banks. And told them to do what, exactly? Loan to which corner grocery, set what interest rate on CDs?

As one can see, the criticisms are not all consistent with each other. If we want Treasury to compel banks to give its money to homeowners, then a lot of that money will disappear, which just means that fixing the financial system will be more costly. Maybe this is a good use of money, maybe not, but it would have made more sense to give Treasury a one-dimensional mission—fix the financial system—than to ask it to redistribute wealth from various bad guys to various good guys. Anyway, Treasury has, wisely, I think, decided that it will stick to fixing the financial system. If it sent a lot of money to homeowners, so the foreclosure rate dipped by a fraction, while the financial system fell apart, no one would give it much credit.

There is a real basis for congressional carping, however, and one that has received little attention so far. The problem is not one of competence and technology, but of distribution. Congress has given enormous power to Treasury to disburse funds as it sees fit. There are a lot of ways of spending this money that is consistent with fixing the financial system. You could give the money to Bank X or to Bank Y. You could give the money to automakers in Detroit or boat makers in Rhode Island. You could buy up a type of securities that institution Z happens to own or another type that institution W happens to own. It's even possible that if you pay banks not to foreclose, in effect transferring money into the pockets of defaulting homeowners, you will avoid eroding the value of the housing stock, buck up the securities based on it, and improve the balance sheets of banks. In short, Treasury can, in the course of fixing the financial system, choose to rescue/benefit/enrich some people rather than other people. Treasury has clearly not chosen the people that the various complaining members of Congress care about—maybe people in their districts, or certain types of people who are likely to vote for them. Why not? Maybe because doing so would be just too costly. Or maybe because the Republicans who currently run Treasury have another group of people they'd rather benefit. We just don't know. All that Congress knows is that the funds could have gone into someone else's pockets.

You might say that Congress has no one to blame but itself. TARP put few constraints on Treasury, even fewer than the original 3-page Treasury proposal. Why didn't Congress compel Treasury by statute to spend the money in a way that it would like? Because it just wasn't possible to agree to legislation that would both give Treasury the necessary discretion to save the financial system and set out the winners and losers in advance (except via side payments to wooden arrow makers and the like). With the next $350 billion disbursement, expect the same.

	[Eric Posner, January 15, 2009 at 12:32am] Trackbacks Carping about TARP-ing. Is TARP a fabulous success? No! But it isn't a failure, either. Look here, for example. The TED spread is a standard measure of financial confidence—roughly the amount of extra interest a bank needs to pay another bank to lend to it rather than to the U.S. government, which is (supposedly, anyway) super-safe. In normal times, it is around 0.5. During the height of the financial crisis, it was around 4.5. Now it's tad below 1. Other indicators are consistent with TED. The purpose of TARP was to unfreeze the credit system. If it is not yet fully liquid, at least it has melted a bit. Mission Accomplished, as President Bush might say. You might say that the credit system would have thawed by itself and TARP was wasteful and unnecessary and did nothing but generate a tsunami of moral hazard that will crest in the future. You might say that TARP thawed the credit system but a cheaper, more modest program could have done the same. You might say that the improvement of the indicators will last only as long as the Fed and Treasury pull the strings on the marionettes. But you don't really know, do you? By the usual standards for evaluating government interventions, which is to say crummy standards, TARP has done okay. The safest thing to say is that it is too soon to tell, but by the same token it is too soon to tell that TARP has failed. Enjoy the good indicators (yes, while the real economy collapses around us, but that is another topic) and stop complaining. So why all the carping? Congress, in its usual way, fulminates and snarls en route to its next disbursement of funds. Here are the criticisms, and some comments. 1. Treasury hasn't compelled the banks to use TARP money to make loans to consumers and businesses. Maybe, but there is a good reason for this. The banks are insolvent. They are using the funds to become solvent. If they were just to lend them out again, the banking system would not emerge from life-support. 2. Treasury hasn't compelled the banks to hold off on foreclosures. Maybe, but if the banks are insolvent or near insolvent, and they held off on foreclosures, then they would become even more insolvent. Holding off on foreclosures means giving up an asset or some portion of its value. Treasury probably believes that fixing the banking system should take priority over helping homeowners, many of whom should never have bought a house in the first place. 3. Treasury hasn't compelled executives to accept lower paychecks. Maybe again, but I suspect there are good reasons here as well. TARP doesn't give government any sticks; only carrots. If executives won't take pay cuts as a condition for receiving funds, then Treasury's only option is not to give the funds, which means not solving the banking crisis. Treasury has avoided wasting a lot of time that would be needed to achieve a largely symbolic and potentially harmful goal. 4. Treasury shouldn't have bailed out the auto industry. I like this argument better but the problem is that it is possible that giving money to the auto industry would help the financial system more than its next best use, such as giving the money to some other banks somewhere. The automakers have more debt than plenty of banks. Still, one suspects that the auto bailout was a stimulus measure, not a credit-thawing measure. 5. Treasury hasn't been "transparent" enough. Everyone likes transparency. But what would a transparent Treasury look like (nothing!)? It would say that we gave money to bank X rather than bank Y because X's balance sheet is a bit better (or worse), or it has better executives, or it has a lot of key assets, or some such thing. It might as well say that it consulted the entrails of a rabbit. These are judgment calls, and while it's always good to have more information, this additional information would just generate more disagreement among the critics. Okay, okay! More transparency, please! 6. Treasury has wasted our money. It will get much of it back, perhaps even a return on it, maybe even a higher return than we taxpayers have obtained through our private investments. 7. Treasury was supposed to use TARP funds to buy mortgage-related securities, not to purchase preferred stock in banks and other financial institutions (and automakers). But the statute authorized Treasury to do what it wanted with the funds, and although Treasury initially planned to use the funds to buy mortgage-related securities, it quickly realized that buying stock was a better way to revive the banking system. Well, good for them! They changed their minds when they were persuaded that their first idea was no good (though it may turn out to be good after all). 8. Treasury should have exerted more control over banks. And told them to do what, exactly? Loan to which corner grocery, set what interest rate on CDs? As one can see, the criticisms are not all consistent with each other. If we want Treasury to compel banks to give its money to homeowners, then a lot of that money will disappear, which just means that fixing the financial system will be more costly. Maybe this is a good use of money, maybe not, but it would have made more sense to give Treasury a one-dimensional mission—fix the financial system—than to ask it to redistribute wealth from various bad guys to various good guys. Anyway, Treasury has, wisely, I think, decided that it will stick to fixing the financial system. If it sent a lot of money to homeowners, so the foreclosure rate dipped by a fraction, while the financial system fell apart, no one would give it much credit. There is a real basis for congressional carping, however, and one that has received little attention so far. The problem is not one of competence and technology, but of distribution. Congress has given enormous power to Treasury to disburse funds as it sees fit. There are a lot of ways of spending this money that is consistent with fixing the financial system. You could give the money to Bank X or to Bank Y. You could give the money to automakers in Detroit or boat makers in Rhode Island. You could buy up a type of securities that institution Z happens to own or another type that institution W happens to own. It's even possible that if you pay banks not to foreclose, in effect transferring money into the pockets of defaulting homeowners, you will avoid eroding the value of the housing stock, buck up the securities based on it, and improve the balance sheets of banks. In short, Treasury can, in the course of fixing the financial system, choose to rescue/benefit/enrich some people rather than other people. Treasury has clearly not chosen the people that the various complaining members of Congress care about—maybe people in their districts, or certain types of people who are likely to vote for them. Why not? Maybe because doing so would be just too costly. Or maybe because the Republicans who currently run Treasury have another group of people they'd rather benefit. We just don't know. All that Congress knows is that the funds could have gone into someone else's pockets. You might say that Congress has no one to blame but itself. TARP put few constraints on Treasury, even fewer than the original 3-page Treasury proposal. Why didn't Congress compel Treasury by statute to spend the money in a way that it would like? Because it just wasn't possible to agree to legislation that would both give Treasury the necessary discretion to save the financial system and set out the winners and losers in advance (except via side payments to wooden arrow makers and the like). With the next $350 billion disbursement, expect the same.