TARP: Necessary evil?

It was the bailout “everybody loved to hate,” said Steven Rattner in the Financial Times. Yet when TARP expired last week, it went down as one of the most successful bipartisan government efforts in history—rescuing the U.S. from a second Great Depression, at what ultimately will be a small cost to taxpayers. When Congress approved the $700 billion Troubled Asset Relief Program two years ago, it infuriated both liberals and conservatives, helped give rise to the Tea Party movement, and poisoned the careers of more than a dozen politicians. But two years ago, doing nothing was not an option: Lehman Brothers had just collapsed under a load of toxic debt, and Citigroup, Bank of America, and AIG were teetering on the precipice. If they fell, it would have triggered a total collapse of the financial system. Now that most distressed banks are healthy again and have repaid the government, TARP will cost taxpayers a mere $50 billion, said The Washington Post in an editorial. Indeed, the government might break even, with AIG promising last week to pay back the rest of its loan. “Goodbye, TARP. Good riddance—and thanks.”

Still, don’t forget that TARP “fundamentally changed the rules of the game on Wall Street,” said John Maggs in Politico.com. TARP showed the major banks that they are “too big to fail”—if they get into trouble, the government, like a stern but supportive parent, will bail them out. Despite the so-called financial reform package passed this year, said Gretchen Morgenson in The New York Times, big banks are back trading and gambling on trillions of dollars’ worth of derivatives. If you reward bad behavior, after all, what’s the incentive to be good? Another big market shock is inevitable, someday. When it comes, don’t be surprised to see another bailout.

Some people argue that TARP’s unpopularity will frighten off politicians next time, said Kevin Drum in Mother Jones. But that’s naïve. Over the past two decades, various governments have bailed out Long-Term Capital Management, the Swedish banking system, the Mexican banking system, and the American savings and loan industry. And yet banks and other financial institutions continued to take huge, occasionally stupid risks, and sometimes lost. Sooner or later, there will be another crash, and “the U.S. government—even a U.S. government run by Sarah Palin or Dennis Kucinich—will rescue the banking system. Because it won’t have any choice.”

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