Banking Law

Although the TARP program officially ends today, the Wall Street Journal's Deborah Solomon and Neftali Bendavid contend that Joe Sixpack and Mama Grizzly remain madder than wet hens over the program.

Lawmakers who voted for TARP are fighting for their political lives. Bailout anger has all but ruled out the chance of federal intervention in the foreseeable future. The Federal Reserve has seen its independence threatened. And the Obama administration's ability to respond to the economic crisis has been constrained.

"This whole event can have political implications for 30 years," says Kenneth Rogoff, a Harvard University economist and expert on financial crises.

Although TARP was designed to prevent a collapse of the country's (and, perhaps, the world's) banking system, to most folks it "has come to symbolize what some voters say they loathe about the wider bailout and, to a large extent, Washington: expansive government power, money spent to help Wall Street, and an unwillingness by policy makers to let people pay for their own mistakes." A lot of people want others to "pay for their own mistakes" unless that payment causes them, personally, to miss a daily does of a Quarter Pounder (with cheese), a large order of fries, and a liter of Cherry Coke. Then, by god, you can not only bail "the others" out, but make sure you give me a boatload of cash, as well. Not all, but some of the anger against TARP seems to flow from the fact that it bailed out "fat cats" and not "me." Again, in this country that was (as Nancy Pelosi contends) "founded on diversity" (although you'd look long and hard to parse the "diversity" among The Founding Brothers), painting people's motivations with a broad brush is a mistake. Nevertheless, enthusiasm for the desire to "let free markets take their course" seems to wax and wane depending on whose ox is being gored and/or whose pockets are being lined.

As I said around the time TARP was adopted, it was intended as a temporary, extraordinary measure to stave off a complete meltdown of the economy. As the Wall Street Journal article's authors (and others) point out, it did just that and is likely to cost the taxpayers relatively little in light of what it achieved.

The anger against it, paradoxically, takes no heed of the fact that TARP, along with the broader government rescue efforts, has been arguably a success. It will ultimately cost far less than the initial $700 billion price tag that stunned a nation. Major banks are profitable and can raise capital. Credit spreads?a key measurement of risk?are down to pre-crisis levels.

The White House now projects TARP will lose at most $50 billion, down from $105 billion projected earlier this year. Privately, Treasury Department officials say the U.S. may not lose a dime, and could ultimately make money depending on how some investments fare, in particular American International Group Inc. and General Motors Corp. In a $14 trillion economy, $50 billion is less than 1% of economic output.

"The incredible irony here is that TARP probably succeeded wildly beyond anybody's imagination," said Alan Blinder, a Princeton University economist who co-authored a paper crediting the administration's economic policies with preventing a second Great Depression. "Suppose the original TARP bill had been to spend $50 billion to avert a catastrophe. Would anyone have blinked?"

While irony may work for David Letterman and John Stewart viewers, it rarely plays well in the political arena. People are upset about the abysmal economy and astronomical federal debt and they're looking for scapegoats. As Bob Bennett and Mike Castle found out, angry people tend to make their voting decisions using their endocrine systems, not their cerebrums. Facts simply don't matter. Expect this rage-against-the-(TARP)-machine theme to play out for some time to come. November looks like a time when a whole lot of shakin' is going to be going on in D.C. and in state governments across America. Apparently, some of it will be motivated by anger over a bailout that actually worked.

Here's more irony, for the few that love it: TARP would have been even more successful if it hadn't been bastardized after enactment by two White House administrations, Congress, and federal banking regulators, who decided to extend it to businesses for which it was not intended (AIG and GM, to name two), change the rules of the game after-the-fact (executive compensation restrictions), and deny participation to many community banks who actually could have used the capital to survive (which would have thwarted a hidden agenda to reduce the number of commercial banks by a quarter to a third).