January 15, 2009
Other Than Avoiding Armageddon
Blog friend Josh Hendrickson at the Everyday Economist links to "The Terrible Lessons of TARP" by Barry Ritholtz. Ritholtz is a bright guy and frequent Kudlow & Co. guest. I always considered him the anti-Kudlow. It's surprising they can be on the same show and not disturb the space-time continuum.
Though I tend to fall on the Kudlow side of things, Ritholtz is a serious and smart guy. To provide both sides on CNBC, they always pull up cartoonish bears and leftist political hacks to balance Larry's optimism and general support of the GOP. Ritholtz is neither, but he trends a little bear-ish and has a healthy distrust of politicians of any stripe.
Props complete, but I must disagree with his reasonable and eloquent arguments against TARP. I'll agree with each of his points but he betrays himself in the intro:
What I can say without reservation is that the TARP spending prevented large brokers and banks from going to zero. Since the legislation was passed in the Fall, there has not been a major disruptive bankruptcy.Sure, the FDIC had to take over a few institutions that were overdue for the long dirt nap anyway, but the sort of market roiling Bear Steans collapse, and the subsequent Q3 Lehman/AIG/CitiGroup disasters have at least stopped.
This is not, to be clear, any declaration that the TARP has been a success. We have avoided financial armageddon, but other than that, it has been an abject failure.
Other than that? Other than doing exactly what it was supposed to do, it was an abject failure.
I certainly suggest you read the whole thing. Again, all his points are correct -- it was ad hoc, capricious and wasteful. Fair cop, guv! Other than avoiding financial Armageddon...
How strange. All this time, I thought the purpose of TARP was to "provide liquidity" by taking "distressed assets" off banks' balance sheets.
But now it's a matter of preventing bankruptcies, eh? For these "institutions that were overdue for the long dirt nap anyway," why as a matter of efficiency should anyone try to prop them up?
More important is the moral question: why should anyone be coerced, via taxation, to support these companies that should properly be allowed to fail?
"Bankruptcy," "liquidation" and "merger" are *not* bad words. As Walter Williams recently said, business failures (because of their own actions, mind you) are critical to market processes. It's information about what didn't work, and it's as important to the market as what did work.
But hey, I'll admit it: TARP has been a resounding success in how it violates principles of morality and efficiency.
Posted by: Perry Eidelbus at January 15, 2009 1:37 PMLike the Iraq War, many reasons have been offered for TARP. I chose to look outside my principles (toward my principal?) and support TARP because I truly believed that Secretary Paulson had "stared into the abyss" and felt that a complete seizing of the credit markets was immanent.
I love bankruptcies, mergers, acquisitions and liquidations and agree that where they have been capriciously prevented by TARP is a strike against. Yet my ATM card still works. This makes me happy.
Were we living in lasseiz-faire land last September, I'd be more worried about the intrusion. And I've been clear that the extension of this to the automotive sector (now GMAC, real-estate and possibly porn) is out of line.
Yet I still contend that the original suggestion that the US Treasury would prop up toxic bank assets quite likely averted a serious panic that would have "cost" far more than $700B. (Before you get itchy fingers, I concede that legitimate business losses and coerced intrusion is a dubious comparison.)
If I had my way, they would say "Mission Accomplished" with Paulson landing on the flight deck as FOMC Chair Bernanke throws money from a helicopter. Not release the second $350B, tell all the tin cups lined up in Washington to go home and figure it out.
But I hold that TARP critics too quickly dismiss what could have happened with inaction.
Posted by: jk at January 15, 2009 2:07 PMI take Perry's eloquent side on this one, and would go so far as to add that, were it not for government interference in markets in the first place (most notably the 1995 changes to the CRA), we wouldn't be in this pickle in the first place. Or to put it ironically, the free market would be able to right itself without government meddling, were in not for government meddling with the free market.
Congress can't even balance its own checkbook; it's time we face the fact that money is to Congress what a rattle is to an infant - and when the infant breaks the rattle badly enough, it's time to take the rattle away from the infant and give the child a time-out. In this casem maybe a good spanking, too. Maybe the best way to fix the nation is to defund Congress. The Davy Crockett approach sounds pretty reasonable to me.
Trusting Congress with money is like trusting a fifteen-year-old boy with bourbon and a set of car keys. Sooner or later, it only leads to a flaming wreck by the side of the road.
Posted by: Keith at January 15, 2009 5:59 PMSorry, friends, my apologies - I probably shouldn't comment right after being told my home mortgage has just been transferred (sold) to a Federal bailout recipient; things like that can make a man sound harsh. There's just something about having to owe money to a company that is dependent on my present and future tax dollars to stay afloat - and Citibank, if you're reading this, I'm looking at you.
By the way, Citi - LOVED that article (http://www.cnbc.com/id/28660430) about you today, especially that part about "mounting losses and a plunging stock price."
Back on topic: why yes, I do have a principled opposition to taking taxpayer money against the taxpayers' will and throwing it, as good money after bad, into failing businesses. I don't believe there would have been a financial Armageddon - at the very worst, nothing like the long-term financial Armageddon we're entering because of the bailout.
Posted by: Keith at January 15, 2009 7:50 PMYou can take Perry's side and we're still friends. Let me clarify that had government not interfered originally, I completely agree we'd be much better off. This is what I meant by "Were we living in lasseiz-faire land last September, I'd be more worried about the intrusion."
The fact is that gub'mint had already screwed it up. Our first SecTreas was interventionist, we do not lack for precedent. Perry has argued forcefully that it is a bad idea letting the guys who messed it up fixed it. But they're all we got.
Posted by: jk at January 15, 2009 7:52 PMjk,
The fact that we haven't had any banks fail is not evidence that this has been a success. As Perry loves to say, correlation is not causation.
In order to prove that the TARP is the reason for the lack of failures, you must be able to answer the following:
1. Where did the money go?
2. How has it been used?
3. What would have happened had it not been used?
Admittedly, number 3 is a counter-factual and therefore an answer would only be mere speculation. Nonetheless, I think that you would find it particularly difficult to answer numbers 1 and 2 and without which it is hard to make a case that it has been successful.
Posted by: Everyday Economist at January 15, 2009 10:28 PMI love the ThreeSources commentariat and respect their right as free thinkers in a free market to comment or demur whenever they choose.
But I got zero responses to my post (four south of this one) with a graph of the TED spread. I have made the same case since TARP (using LIBOR, which has the same shape). The point of TARP was to keep credit markets from freezing up like our friend T. Greer in Minnesota.
I cannot (like the old software joke) roll back time and see what would have happened if Secretary Paulson had decided to get a massage and eat some high-fiber cereal instead of intervene. But LIBOR went to an acceptable level and my credit card works in the local ATM. I suspect Alexander Hamilton is smiling down on us even if Jackson and Taney are cursing.
Posted by: jk at January 16, 2009 11:19 AMjk: as my friend Billy Beck says, principles are all that matters. Not blind clinging to an opinion or ideology, but a position borne of reason and care.
Throw out everything else and ask the moral question: why should anyone be coerced, via taxation, to support these companies that should properly be allowed to fail? The ends do not justify the means -- rather, the ends are justified by the means. How you proceed along the journey is at least as important as the destination.
EE is exactly right on the three questions. And to show how ludicrous TARP has become, we don't even know the answers to #1 and #2. So much for government transparency and accountability!
Do you realize that your ATM card would very probably would have anyway, in a parallel universe where TARP didn't pass? You've swallowed the same sort of rubbish that people still accept about FDR's New Deal: "Yes things were still bad, but they'd have been worse if he hadn't acted!" Remember that whatever the government is "injecting," that's our money. The government isn't rescuing us: it's making you rescue yourself. And when it can't tap us for the money now, it borrows it, so we'll probably have paid double the principal amount by the time the debt is retired, because of interest.
You're asking and trusting the arsonist to put out the fire he started. No thanks! The arsonist is hardly "all we've got" -- we have the free market to carry us through.
Posted by: Perry Eidelbus at January 16, 2009 11:47 AMjk,
1. What credit crisis?
2. As I have said before, this was never a problem of liquidity, but rather counter-party risk (see here and here). This suggests that the best form of action is to let/facilitate the bankruptcies of the failing firms. What we have done with the TARP is exactly the opposite. We are continually funneling money to the failing companies to keep them afloat.
3. What is the evidence that the TARP is what caused the TED spread and the LIBOR to come down? They are, by the way, still at historically high levels.
Posted by: Everyday Economist at January 16, 2009 9:45 PMI was actually going to use that to my advantage. The original TARP proposal (we call it Tarp Classic® now) was more about counter-party risk than liquidity.
I suggest that LIBOR and TED spreads measure counter-party risk and that the realization that the US Treasury was "backstopping" some of the toxic assets mattered more than the exact vehicle or procedures. I would not have changed TARP Classic® to New TARP with extra liquidity. But then, they don't let me be SecTreas.
Yes they're still high but North of 800 bps is untenable -- that's ATM and credit card doesn't work territory.
Posted by: jk at January 17, 2009 12:35 PMjk,
I am trying to follow you here, but you are losing me. You are correct that the particular credit spreads measure counter-party risk. You are also correct that the TARP classic was aimed at reducing such risk. Finally, you correctly assert that the actual TARP just injected capital directly into the banks and was thus aimed at adding extra liquidity.
So how is it that a TARP aimed at increasing liquidity lowered credit spreads?
I assume that your comment amount backstopping is your evidence. However, if you look at the LIBOR-OIS spread, you will notice that after hovering between 50 and 100 basis points, it rose to nearly 400 basis points shortly after the announcement of the TARP.
Posted by: Everyday Economist at January 19, 2009 11:09 PM | What do you think? [11]