How TARP Staved Off Disaster

Did the Troubled Assets Relief Program save the world? I think I can make a good case that this much-reviled government “bailout” did just that.

Two years ago the banking system, and the world economy, stood on the brink of disaster. Nobody trusted that they knew the value of anything, rendering everyone effectively broke. It was a bad situation for all involved, but an impossible situation for banks, which responded by limiting lending, even to one another. Without lending there could hardly be an economy, let alone an economic recovery.

TARP was first and foremost a commitment by the U.S. government that America’s banking system, and the world’s, would not be allowed to collapse. This provided time for things to settle down, for markets to begin functioning again, and for everyone to appreciate that the banking system’s problems were manageable, as was later documented by the stress tests. TARP did not just rescue the banks; it rescued everything and everyone from financial chaos.

But now, as the program is wrapping up, few Americans are inclined to see the legislators who voted for TARP as heroes. “This is the best federal program of any real size to be despised by the public like this,” Douglas J. Elliott, a former investment banker now associated with the Brookings Institution, a Washington think tank, told The New York Times. In a July poll for Bloomberg News, fewer than three in 10 Americans said they thought TARP had been necessary “to prevent the financial industry from failing and drastically hurting the U.S. economy.” And, as the campaign season continues, voters are ready to blackball any candidate who so much as hints that TARP might have been a good idea.

This ongoing hostility toward the program continues even as new reports show that, in the end, TARP may not cost taxpayers anything. The Treasury Department reported recently that, in the worst case scenario, the net cost of TARP will be about $50 billion. In the best case scenario, the government may actually make money off its investments.

Since Oct. 1, the Treasury can no longer commit money to new initiatives under the program. Of the $700 billion that Congress authorized, the Treasury only ever committed $470 billion, $387 billion of which has actually been disbursed.

Even though the news from the accounting department is good, Treasury Secretary Timothy Geithner has been quick to point out that the real achievement of TARP is not that it recouped taxpayers’ money, but that it provided enough of a boost to restart the economy. “We weren’t in the business to make money,” he said.

As an economic intervention, TARP was highly effective. The price of borrowing fell rapidly in 2009 as banks were convinced to write more loans. As the economy rebounded, banks were able to quickly replace public funds with private capital, indicating a renewal of confidence.

Of course some TARP money was undoubtedly misused or even abused. Those who put TARP together and those who oversaw its implementation had no cookbook to follow; they had to invent everything as they went along. Mistakes were inevitable.

Using TARP money to rescue auto companies was, I believe, questionable. Even with the new optimistic estimates, the Treasury still expects to come out in the red on its auto industry investments, and it’s debatable whether the booster shot to auto companies really did much for the economy as a whole. But, if you ask a group of actors to simultaneously write, rehearse and perform a Broadway show, you ought to be happy if they pull it off. You can’t expect them to win a Tony. The authors of TARP pulled it off.

Americans who loathe TARP often conflate the costs of the program with other costs from the economic meltdown. The real costs of the financial crisis are embedded in the millions of underwater mortgages and in the hundreds of billions, if not trillions, of dollars it will take to clean up the mess of Fannie Mae, Freddie Mac and other elements of the mortgage system. Most of those costs are not reflected in the TARP figures. The public is right to suspect that a big and unpleasant surprise is coming, but it is wrong to believe that TARP will be the vehicle for that surprise, or that we would have been better off without TARP.

Regardless of the facts, many people insist on believing that TARP was a “bank bailout,” which handed taxpayer money over to big businesses while leaving middle-income people to suffer the recession out in the cold. They argue that the government should have instead put money toward job creation, without realizing that employers depend on banks in order to stay in business. If banks disappear, so do jobs – everybody’s jobs.

Given all the economy’s other problems, it’s not easy to celebrate TARP. But we ought to at least recognize it for the success that it was, and credit those who came up with it in a moment of true desperation. We are a long way from being out of the financial woods. It will be a lot easier to make things right if we can at least distinguish between success and failure.

A lot of politicians who supported TARP are going to lose their jobs this year. They fell on their swords for us, and I believe historians will someday take note of their sacrifice.

About Larry M. Elkin 534 Articles

Affiliation: Palisades Hudson Financial Group

Larry M. Elkin, CPA, CFP®, has provided personal financial and tax counseling to a sophisticated client base since 1986. After six years with Arthur Andersen, where he was a senior manager for personal financial planning and family wealth planning, he founded his own firm in Hastings on Hudson, New York in 1992. That firm grew steadily and became the Palisades Hudson organization, which moved to Scarsdale, New York in 2002. The firm expanded to Fort Lauderdale, Florida, in 2005, and to Atlanta, Georgia, in 2008.

Larry received his B.A. in journalism from the University of Montana in 1978, and his M.B.A. in accounting from New York University in 1986. Larry was a reporter and editor for The Associated Press from 1978 to 1986. He covered government, business and legal affairs for the wire service, with assignments in Helena, Montana; Albany, New York; Washington, D.C.; and New York City’s federal courts in Brooklyn and Manhattan.

Larry established the organization’s investment advisory business, which now manages more than $800 million, in 1997. As president of Palisades Hudson, Larry maintains individual professional relationships with many of the firm’s clients, who reside in more than 25 states from Maine to California as well as in several foreign countries. He is the author of Financial Self-Defense for Unmarried Couples (Currency Doubleday, 1995), which was the first comprehensive financial planning guide for unmarried couples. He also is the editor and publisher of Sentinel, a quarterly newsletter on personal financial planning.

Larry has written many Sentinel articles, including several that anticipated future events. In “The Economic Case Against Tobacco Stocks” (February 1995), he forecast that litigation losses would eventually undermine cigarette manufacturers’ financial position. He concluded in “Is This the Beginning Of The End?” (May 1998) that there was a better-than-even chance that estate taxes would be repealed by 2010, three years before Congress enacted legislation to repeal the tax in 2010. In “IRS Takes A Shot At Split-Dollar Life” (June 1996), Larry predicted that the IRS would be able to treat split dollar arrangements as below-market loans, which came to pass with new rules issued by the Service in 2001 and 2002.

More recently, Larry has addressed the causes and consequences of the “Panic of 2008″ in his Sentinel articles. In “Have We Learned Our Lending Lesson At Last” (October 2007) and “Mortgage Lending Lessons Remain Unlearned” (October 2008), Larry questioned whether or not America has learned any lessons from the savings and loan crisis of the 1980s. In addition, he offered some practical changes that should have been made to amend the situation. In “Take Advantage Of The Panic Of 2008” (January 2009), Larry offered ways to capitalize on the wealth of opportunity that the panic presented.

Larry served as president of the Estate Planning Council of New York City, Inc., in 2005-2006. In 2009 the Council presented Larry with its first-ever Lifetime Achievement Award, citing his service to the organization and “his tireless efforts in promoting our industry by word and by personal example as a consummate estate planning professional.” He is regularly interviewed by national and regional publications, and has made nearly 100 radio and television appearances.

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