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TARP Confusion--Skeel

One of the biggest punching bag this election season seems has been the $700 billion TARP legislation that Congress passed in fall 2008 to rescue the banks. Those who voted no have trumpeted this fact, and many of those who approved have said as little about it as possible.

There were indeed several major problems with TARP and its rollout. The first was that then-Treasury Secretary Henry Paulson stunned Congress when he told lawmakers, with almost no explanation, that the economy would crash unless they immediately handed over $700 billion. Indeed, some studies show that the shock of Paulson’s Congressional appearance was the single most unnerving moment of the fall 2008 crisis. The second problem is that the TARP funds, which were designated for “financial institutions,” were treated as an all-purpose kitty that Paulson and his successor Tim Geithner could use for purposes that Congress never intended, like bailing out Chrysler and GM.
But this doesn’t mean that pumping money into the banking system was a mistake.  In my view, rescuing individual firms like Bear Stearns or AIG is almost always a terrible idea.  But if the entire banking system is on the verge of paralysis, as it was in 2008, industry-wide intervention is necessary.


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Comments ( 1 )

Could we have achieved the same goal as TARP in a politically more palatable way, stabilizing the banking system, by just buying up the mortgages and RMBS? Unless I am wrong, the banking system essentially failed because of its investments in the housing sector. The government could have bought up these assets, which would have stabilized the system, just as it did with the capital infusion. Plus, the government could have restructured the mortgages to prevent the foreclosure crisis we have now. Is this moral hazard run wild. Absolutely. But so is what we did for the banking system.