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Tett on TARP and the apocalypse

by Robert Teitelman | Published May 13, 2011 at 11:12 AM

Sometime next weekend, on or about May 21, the world is supposed to end. I learned this, first in the newspaper, then from a nice woman handing out flyers on the way home from work. This is really something you want to read about on the way home. That said we've all grown accustomed to the next apocalypse. We've learned to shrug it off, schedule around it, switch the channel. And yet, and yet: Who knows? Perhaps the next destruction of the banking system, the next implosion of the markets, the next prediction -- let me check my e-mail -- that the dollar is less-than-worthless, that the full faith and credit of the U.S. is a massive fraud, that we are plumb out of oil or, even, that we are camped at the end-of-days (Arab Spring, Israel, America etc.) will prove correct. After all, that's how these things work, no? Just when you can shrug off a government that is flat broke and a Ponzi scheme to boot, a tsunami roars in that we weren't expecting and a nuke heats up.
This end-of-week reverie is, believe it or not, instigated by a fine column from Gillian Tett in the Financial Times. Her subject is the much-derided Troubled Asset Relief Program, which is about to sell off its 92% stake in the similarly derided American International Group. Tett takes the opportunity to reconsider TARP, which was approved by a Congress apparently held hostage by scary Hank Paulson, then roundly denounced by nearly everyone running for office (or anyone with a hand-lettered sign) as a disgraceful bailout and a suspicious sop to the big banks, including, of course, Neil Barofsky, its own inspector general. And yet, and yet: As Tett says, TARP hasn't done so badly. Even with AIG stock down 40% this year, the sale of the stake should allow the government to get most of its money back (not the full $700 billion, but what she calls TARP-lite that was actually spent: $475 billion). You can check her math for yourself and ponder her caveats: This accounting doesn't include the wider damage to the economy, what might happen to the banks if asset prices fall and the fact that TARP has left a lot of moral hazard lying around.

"But even allowing for those caveats, the result is still amazing -- at least by historical standards," she writes. And what are Tett's lessons? "One is that it pays to be big: America has found it easier to support its banks than, say, Ireland, because they are a smaller proportion of GDP. Another lesson is that it pays to be decisive and dramatic with policy announcements -- but flexible in implementation. ... But perhaps the biggest lesson is about America's political economy. U.S. officials like to claim today that Tarp shows the value of being 'resolute' in banking crises. However, the dirty secret is that America procrastinated shamefully for a year before Tarp was produced. And even then, Tarp was initially rejected by Congress, before a market crash shocked politicians into a deal." Somewhere, Paulson is glowing.

Somehow Tett extracts optimism about political gridlock and imminent apocalypse over fiscal matters from this homily. On that, we'll see. She is correct, however, that in America it takes an apocalypse -- or the sense that this is really The One -- to get anyone to pay much attention to anything but their craven self-interest. Indeed, talking points on both the right and left wings continue to argue that the post-Lehman, AIG implosion crisis that led to TARP, with global markets shutting down and more sirens and flashing lights than at Fukushima, was not really a meltdown, but just a few days of pain that would have cleared itself up through either self-medication (from the right) or nationalization (from the left). This is an untestable, if far-fetched, hypothesis, which is one reason it's so popular.

Tett is mainly right about all this. TARP was messy politically and from a policy standpoint, not unlike the let's-try-anything-and-everything New Deal, which nearly everyone now praises. Paulson, whose reputation may or may not be salvaged in HBO's "Too Big to Fail" that premiers after the end-of-days, May 23 (Felix Salmon has seen it and discusses it with the book's author Andrew Ross Sorkin here), was excoriated for his clumsy and abrupt changes of direction on TARP. Indeed, the process of getting it passed in Congress was messy. The charges and countercharges swirling around it were messy. American politics is unendingly messy. And yet, and yet: As Tett says, it turned out to be a pretty decent save-the-banks policy, if not perfect. One suspects that other pieces of the much-derided bailout scheme -- the stimulus, the car bailouts -- will also look better in time than they have been characterized politically. And, let us not forget, like the New Deal, a lot of the experiments that went on will turn out to be dismal failures, particularly mortgage relief and other housing measures, and thus potential targets for critics. The remaining big question: Fannie Mae and Freddie Mac.

But there is history and there is politics; there is a longer perspective and there is rabble-rousing and demagoguery. For all of the consensus gathering about TARP, politically it remains toxic, synonymous with a phrase that's as radioactive as tax increases: bailouts. There is a sort of broader lesson here. It is certainly true that in the long run, historians may find TARP to be a key element in saving the banking system. (Some critics, like the nice lady with flyers, wish the banks had collapsed.) But it's not just that by then we'll be dead, or at least, edging toward it. The "value" in TARP does not just remain in hiding, only to be revealed like the messiah in time. The vitriolic reaction to TARP created a political climate that effectively shut down the possibility, which we fortunately never needed, of TARP II and played a role in shaping the Obama stimulus. TARP didn't just alter perceptions of Paulson; it lay waste to any policy that could be construed as a bailout (indeed, the mania over "bailouts" left its imprint on Dodd-Frank, which demands a kind of rigid liquidation that is, in a crisis, pretty moronic). In short, the kind of experimentation that Tett praises in TARP is exactly what TARP haters want to eliminate forever-and-ever.

We are never quite the same after a crisis as we were in the nostalgic days before it struck. For all the sensible qualities of TARP today, there's no going back any time soon. TARP's very success means that it may be many years before it's a viable policy option again. That's the way it is with these near-apocalypses. Every one we manage to avoid takes us closer to the next one. See you next Saturday. - Robert Teitelman

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