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Source link: http://archive.mises.org/14167/was-tarp-good-for-the-taxpayers/

Was TARP Good for the Taxpayers?

October 7, 2010 by

Despite the chorus of praise, the TARP bailout was a terrible idea that will cost taxpayers both directly and indirectly through its perverse incentives. Only the Austrians consistently opposed the Republican and Democrat bailout schemes. FULL ARTICLE by Robert P. Murphy


Dave Albin October 7, 2010 at 10:11 am

Very good – is there an article on here about the role of the tax code and pension funds in all of this? It would seem to me that 401K’s and govt. pensions and other big funds would be useful tools for the big banks and their poor investing ideas (backed up by the bailout thugs in DC). Are we creating vast pools of money, in a few concentrated places, to be used for risky investing? Absent this, the local and online banks would get most of this money, would they not?

Vlad Popovic October 7, 2010 at 11:19 am

TARP and the simulus were the best things ever to happen to taxpayers but it will be in the long term and not at all in the way described by its proponents.

The American voter learned that you can bombard congress with calls and letters 100′s or 10,000′s to one against something, and they will vote in lockstep against you. He/she now sees that the game is rigged, that the state is nothing but a house of marked cards that floats on a semi-viscous ooze of lies.

Thanks to TARP, Mises and LRC are picking up more “eyeballs” every day. People are (re)discovering Rand, Rothbard, Hayek et al. and they are engaging in the lost art of critical thinking as a result. TARP is dead, but its memory will help advance the cause for Liberty forever. Long live TARP!

Vlad Popovic October 7, 2010 at 11:24 am

I was about to correct the spelling of stimulus, but the more I look at it the more I like it the way it is.

Bill Green October 7, 2010 at 11:51 am

“the Fed expanded its balance sheet by more than a trillion dollars in late 2008, relieving the banks of their bad assets through various purchases and other deals on terms that no private hedge fund would have offered…So although the Treasury may have “made money” on a certain category of the TARP investments, this is hardly a boon to the taxpayer, because some (possibly all) of the major banks were propped up by the Fed’s money creation.”

So if I undertsand it correctly: The federal government bought stock in banks through TARP, then it (through the fed. reserve) gave the same banks new money it created (not part of TARP), then their stocks went up in value, and now the Fed Gov. claims it made money on the stock purchase, without accounting for the cost of the inflationary support of the banks. Is that right?

I suppose this is a good strategy for the Fed Gov (and teh banks), which may have truly “made money”, but only at the expense of the currency and the common man.

Steve Hogan October 7, 2010 at 1:33 pm

This is a good summary of the economics behind TARP. What is only implied, however, is the blatant immorality of the program. Using force to steal from average Americans to feather the nests of the banking elite is about as evil as it gets.

There are a whole bunch of politicians and bankers that need to go to jail over this. Instead, they’re rewarded for their reckless behavior and induced to repeat their mistakes at our expense. See something wrong with this picture?

michael metz October 7, 2010 at 4:33 pm

The question I ask by reading only the conclusion, or even a writing more succinct than the conclusion: how does a user of fiat currency portion out resources so as not to lose with inflation, for example?

We are stuck with fiat currency. We are stuck with what was done. What sectors do we use so we maintain sound sources of cash flow?

The term theory really means guess. I would learn from hearing what others are doing with resources to manage best, and responsibly, our own little micro economic worlds.

Troy Doering October 7, 2010 at 4:50 pm

Tarp was probably the most truthful Acronym, after all a Tarp is a protective covering. nor should we forget the $280 billion pork bill they passed. Politicians have to say it was a great program, after all government is the solution. It really was a powerful statement on who our government serves. Wall st. is its master. Banking is one of the top three lobbyists. And its influence controls both parties. For all of Obama’s hyperbole about change he kept Bernanke and Geithner, There here to stay regardless of regime changes.

Pete October 7, 2010 at 7:31 pm

While TARP was hardly a good thing, when compared to most of the things the government does, it was almost heroic. If it had a chance of breaking even, it is better than most government spending.

RTB October 7, 2010 at 8:17 pm

Yes, TARP was a success. A success in propping up a corrupt banking system….for a while.

A. Viirlaid October 7, 2010 at 10:00 pm

Yes that’s right, commercial and industrial loans at all commercial banks were at an all-time high … right when TARP was implemented. And then they fell like a stone. This doesn’t prove that loans would have been higher in the absence of TARP, but it should make us pause when we hear how great the program was in getting credit to small businesses.

The role of the Federal Reserve is even more important than the above points. Under Ben Bernanke’s leadership, and in coordination with then–New York Fed President Timothy Geithner, the Fed expanded its balance sheet by more than a trillion dollars in late 2008, relieving the banks of their bad assets through various purchases and other deals on terms that no private hedge fund would have offered.

The main issue is not whether TARP was repaid or not, partially or fully. I agree with Robert P. Murphy that this is at best a distraction, thrown out to us, to make us think that something “successful” has been done by the authorities.

The question remains, did it do any good, and are any other of The FED’s (and Treasury Department’s) continuing interventions doing any good?

I would agree with the sentiments of Robert P. Murphy —— these interventions are useless at best, and grievously harmful at worst.

But should we be surprised?

The FED was largely responsible for all the busts and booms over the last 50 years.

The Mother of All the Booms is the Credit Bubble Boom created via The FED’s continuing money system interventions since its creation in 1913 —— but most noticeably since the start of Alan Greenspan’s tenure.

This Mother of ALl Booms has been busting since 2008 and is continuing to implode.

Now IMO The FED has lost any remaining semblance of its institutional sanity with its continuing interjections of fiat money via QE —— Quantitative Easing.

This policy will be shown some time by future economic historians to be the worst policy that The FED could possibly have chosen to “help” the Economy.

There is no theoretical justification for it, other than Ben Bernanke’s addled musings.

This policy has so distorted long term bond prices that we are essentially in the same situation with these bonds today as we were with Housing prior to the implosion of that sector. And we all know how that played out. Should we expect anything remotely different in how the game of Quantitative Easing plays out?

Let me expand a bit on this part of The FED’s stupidity (there is no other word IMHO).

A few short quotes follow, as taken from this morning’s (Oct. 7, 2010) MarketWatch CREDIT MARKET’S column “More QE may mean further drops for British yields” at http://www.marketwatch.com/story/british-government-bond-yields-may-fall-further-2010-10-07?dist=beforebell

“The yield on the 10-year British government bond stood near 2.92% Thursday, down from around 2.93% on Sept. 28, the day MPC member Adam Posen delivered a speech declaring a ‘clear’ case for additional easing in order to avoid a prolonged, Japan-style economic downturn.”

“The program is designed to boost the money supply by effectively creating new money via electronic reserves which are then used to purchase bonds and other assets. The aim of quantitative easing is to avert a deflationary spiral.”

Far from helping avert a deflationary spiral, QE forces yields down and undergirds the price deflation ‘spiral’. “Japan, here we come!” We are all turning Japanese.

I don’t really understand what part of Japan’s experience with the QE ‘solution’ The FED and The Bank of England do not ‘get’. It could not be clearer IMHO.

QE (quantitative ‘easing’ or money printing) during a massive credit implosion reinforces the collapse of general prices.

In spite of huge injections of money, prices are not rising. Some day this approach may lead to hyperinflation, but that day is not yet here.

As Mike “Mish” Shedlock, in his blogs, has so eloquently and repeatedly outlined, Ben Bernanke and his counterpart in the U.K., Mervyn King, have lost their credibility on this very important issue. They simply appear not to know that their monetary policy is broken, absurd, and adding to the problem, not alleviating it.


Let’s examine what The FED is doing. The U.K. is in lockstep with this approach.

The FED artificially (i.e., against the free marketplace’s preferences) forces short-, medium-, and long-term rates downwards — that is, in essence, the entire yield curve drops downwards as one entity on the graph of interest yield versus term. In the “old days” The FED was satisfied with only doing its damage at the short end of the yield curve. Today they do it at the long end as well with their euphemistically-tagged “Quantitative Easing”.

The FED reduces the reward that savers receive from lending their money to borrowers. The FED thereby increases the savers’ risks (of not getting adequate returns to compensate for both future inflation, and for potential loss of principle from default).

That is, The FED artificially skews the free-market risk-reward assessment that this market would otherwise make (in the absence of manipulation), and thereby essentially throws the risk-reward assessment out of the window.

The FED must really believe that this risk assessment is meaningless to would-be investors, which of course it is not. In fact those investors still continue to make their own personal assessments, but now they do it in a modified way, that skews the way that they invest their money. This goes under the Law of Unintended Consequences — something happens that The FED did not consider, or did not consider being material.

The FED does not make clear to the marketplace (in their minutes and notes) whether or not they understand this dynamic. I personally think they do understand it, but they may be underestimating the overall negative effect that their interventions are having. The FED may have a reason for not discussing this, but I do not know what that reason might be.

For sure The FED has enough smart employees who would or should have identified the associated policy risk (IMHO) of their strategy — although what concerns me are phrases I have heard from people like Bernanke suggesting that they “do not have much past experience with what they are doing at the long end of the curve” (or words to that effect).

The FED does its intervention with good intentions, of course. Since one of The FED’s jobs is to ‘stimulate’ the Economy, it (The FED) sees that one of its main jobs is to ensure that borrowers (who are seen by The FED as moving the Economy forward with their spending- and their hiring-initiatives) have as easy a time of getting low-cost funds as possible during this downturn.

Here’s the rub. The yield curve at the long end is no longer giving the normal free-market signals for high-risk, long-term investments to be made. The FED has seen to this. The FED is doing this to encourage borrowing but it is guaranteeing that the most useful borrowing is not being done. This is in addition to the dynamic whereby borrowers are not finding many investment opportunities due to low demand from consumers and due to over-capacity in many sectors, overhanging capacity from the prior artificial FED-induced boom.

So the normal savers, lenders, and investors (“SL&I”) are stepping back from providing higher risk loans to precisely that sector that makes up the would-be job creators, and instead these “SL&I” are essentially parking their money “in the mattress”.

So these SL&I ‘hoard’ their savings in deposits that are very liquid, and cannot easily be accessed by higher-risk borrowers, since those borrowers need longer-term money, which is usually more illiquid.

These savers find some other very low risk, low return investment (again usually for very short terms, so as to allow for emergency reallocation should interest rates or price inflation rear their heads and “move against their interests”).

But these ‘parked’, safe, investments are not the ones that The FED is trying to encourage these otherwise-available funds to move into —— since they typically are not the ones that will get the Economy “moving again”.

So if the Economy-moving, job-creating, initiatives are being starved of funds, the Economy fails to move forward in the manner that The FED is hoping —— yesterday’s news said that private sector jobs fell again in America for the month of September — please see ADP’s report from October 6.

If this low-job-creation dynamic can at least partially be explained by the FED-set low (long-end) interest rates, then no (or relatively few net-new) jobs are created. No net-new demand is created, and we fall into a very slow-mode recovery (which does not feel like a recovery) because the Economy is expanding so sluggishly that few jobs are created.

As more and more students graduate, and as more and more baby-boomers fail to retire unless laid off —— the boomers will mostly keep working, especially since their retirement plans and investments have suffered so much and also their homes are worth less —— and as the pool of people looking for work keeps expanding, and as wages stagnate, and — well, you get the picture — price deflation results.

This dynamic was not a big problem in the past — in the past, The FED never really engaged in Quantitative Easing, which uses FED-created net-new fiat paper money to buy longer term Treasury bonds from the government. These bonds tend to set the benchmark for longer term interest rates.

In the past The FED engaged primarily in only setting (distorting) the short-term interest rate market by manipulating only at that end of the yield curve.

The ENTIRE yield curve is now being pushed down by The FED’s actions. This effect was seen, when confined to the short end, to be “beneficial” in the past. This time the effect has NOT been to push investors from shorter terms to longer, higher-yielding terms, as was the case in the “good old days”. In those days, the higher yield would compensate for the higher risk. Today, The FED has removed that free-market compensation via the side effects of their QE, or “Quantitative Easing”.

The marketplace which most needs this money is thus starved of investment funds.

Unless of course The FED and the Federal Government decide to not only incur debt on behalf of the government’s needs, but actually start to become the source of “last-resort” funds for the private sector’s job-creating and investment-requiring enterprises as well.

What is likely happening here (depending on how much QE in total that The FED does) is that we are living through 3 separate phases.

The first was the pre-bust phase, where price inflation in real assets and financial assets was taking place —— mostly “thanks” to Alan Greenspan’s easy-money policies.

After the credit implosion (and this credit collapse is continuing today) there is likely to be price deflation as described above —— this is the second phase —— there may be outright price deflation, or very mild inflation, as the printing presses try to counteract the credit implosion, but cannot adequately do their job. We are living through this second phase today. There is a problem because really The FED can only distribute its newly-printed (net-new) fiat money to the governments, both state and federal. The FED cannot really distribute its new money to companies or individuals, unless The FED starts to buy up corporate bonds, along with Treasuries. Or starts up the helicopters (for real).

The last phase comes only if The FED really cranks up the money-printing, and that is Hyper-inflation.

The problem is that even The FED does not know any longer what the free-market prices of bonds of varying terms are —— The FED has destroyed the useful price feedback function that a free market provides. Controlling interest rates, and now at the long end of the yield curve as well, is a recipe for DOOM.

We have thus lost information —— and the Economy is blind to price information signals that would normally be generated purely by demand and supply “pushes” and “pulls” —— without the dynamism provided by a non-controlled pricing system, we are all blind.

Wage and price controls, and centrally-mandated, command economies went out of fashion with the collapse of the Soviet Union around the year 1990.

The FED does not read history I guess.

Because The FED’s use of its monetary “tools” is destroying what little is left of a normal, functioning economy.

The FED simply must appreciate that it has to “stand aside” —— as in Seinfeld, the American people have to demand that The FED “Step Off!”

Andrew October 7, 2010 at 11:55 pm

Succinct and well written; Bob Murphy hits it out of the park again!

Inquisitor October 8, 2010 at 7:10 am

Even if the programme did develop “profits” (meaningless term for government activities), it doesn’t mean there were not yet -more- profitable ventures the private sector could’ve invested it in, and thus it is still a “loss” in terms of opportunities foregone.

J.P. October 8, 2010 at 11:43 am

While the article’s scope is interesting enough, I think the use of “government” and “make [legitimate] money” in the same flow of ideas is fallacious as an assertion and a waste of time as a question. Were the government bureaucrats and representatives interested in doing legitimate business they would find a different profession; one which didn’t involve protecting at gunpoint their source of revenue from a consumer base increasingly dissatisfied with the product they’re receiving. Were our government to go private tomorrow, their services wouldn’t survive serious, free competition for a day.

James March 5, 2011 at 12:07 am

To me, the most important points are that it was necessary and that it did good. I find the discussion, or refutation, of those unsatisfactory in Murphy’s article. And to my knowledge there are no articles that address these points on mises.org. The first point, that it was necessary, is addressed in small way here, where there is a kind of weak refutation of the evidence that supports that it was necessary, that nothing was done before and something bad happened. What about simulations of what happens with and without intervention? What about same simulations with different levels of intervention and or at different times and or distributed in different ways, such as more broadly than to big banks, with and without AIG, etc.? And when it’s said it was necessary what does necessary mean? Is the Austrian view be that the recovery would have been expedited if nothing was done? Would other banks, maybe smaller ones, or ones less impacted by what occurred, have expanded and supplanted? What is the evidence on those? To the second point, that it did good, same set of points? Is there evidence of how much good would have occurred given other actions? What does good mean?

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