With the economy showing signs of recovery, memories of the panic that raced through Wall Street and Washington a year ago are fading. People remember that the U.S. financial system was teetering toward an abyss, but the anxiety is gone. Mostly forgotten, too, is the surprise that President George W. Bush, a conservative Republican, was fearful enough to ask Congress for $700 billion to prop up the nation’s faltering banks--and the shock when the House, at a moment of grave national crisis, initially voted “No.”
The stock market concluded after the vote that Washington had lost its mind. The Dow shed a record 778 points that afternoon, as the market said, in effect, what some members of Congress either couldn’t grasp or wouldn’t admit to their constituents: The big banks that acted so irresponsibly would have to be bailed out because, without them, the entire lending apparatus that provides everything from car loans to mortgages to business credit would grind to a halt, bringing the economy crashing down with it.
A chastened Congress quickly reconsidered and approved the Troubled Asset Relief Program, though by a narrow vote.
No one can prove that the economy would have fallen into a second Great Depression, as economists across the ideological spectrum feared. Nor can anyone prove that TARP prevented it from happening, but it’s astonishing in retrospect that so many members of Congress were willing to bet the country on the notion that TARP was, as one congressman put it, “a hustle.”
Like any program thrown together in a crisis, TARP has been far from perfect. It lacked transparency at the outset, it hasn’t substantially boosted bank lending (which is hard to do in a recession), and it hasn’t even been used for its originally intended purpose of buying troubled assets to improve bank balance sheets. Instead, the Department of the Treasury wound up force-feeding TARP money to banks to stabilize the system. It was one of several programs Treasury and the Federal Reserve deployed in a desperate attempt to stave off disaster.
Together, those efforts conveyed the message that the government would keep the system from collapsing. The psychological impact was as potent as the financial one. The crisis receded, and though some banks are still weak, meltdown never occurred.
Nor did all the TARP money disappear down a rat hole, as critics still suggest. Taxpayers so far are even making a little bit on some of their investments. Of the $250 billion that went to banks, about $70 billion has been repaid, along with about $12 billion in dividends and other income. Other institutions, including Bank of America, are preparing to repay TARP money. It’s very unlikely, though, that taxpayers will get back all the money TARP provided to keep AIG, Chrysler and General Motors afloat.
There are a couple of lessons here.
One is that the passage of time allows for an assessment of who acted responsibly at the critical moment, and the overwhelming evidence so far is that the responsible vote on TARP was “Yes.”
The other is that this can happen all over again unless financial regulations are tightened and compensation practices in the banking industry are altered.
Any lawmaker who wants to redeem a 2008 mistake would do well to ensure that 2009 doesn’t end without tough new rules designed to prevent another bank bailout.
