The True Cost of TARP

What does the fact that, so it now seems, the TARP program will only end up costing taxpayers $25 billion tell us about the merits of the program? According to Jonathan Chait, this low price-tag makes the program “one of the most successful policy initiatives in American history.” This is a bad argument. If, as its proponents claim, TARP really did stave off a second Great Depression, then it would have been one of the most successful policy initiatives in American history even if it had cost taxpayers the full $700 billion. On the other hand, if TARP wasn’t necessary, then it likely wasn’t worth it even at the cost of only $100 per American.

Positive assessments of TARP seem to typically assume that the alternative to TARP would have been doing nothing (actually many opponents of TARP also tend to assume this). But this is not plausible. If Congress had decisively rejected TARP, it’s not like Bernanke was going to pull a Ray Patterson and book a cruise to Fiji. Instead we likely would have had an earlier bigger QE I. The overall economy would have ended up roughly in the same place, except that Wall Street would have borne a larger share of the pain.

This, at any rate, is the view of a number of iconoclastic economists on both the left and right. Here, for example, is Dean Baker:

Had it not been for the bailout, most of the major center banks would have been wiped out. This would have destroyed the fortunes of their shareholders, many of their creditors, and their top executives. This would have been a massive redistribution to the rest of society — their loss is our gain.

It is important to remember that the economy would be no less productive following the demise of these Wall Street giants. The only economic fact that would have been different is that the Wall Street crew would have lost claims to hundreds of billions of dollars of the economy’s output each year and trillions of dollars of wealth. That money would instead be available for the rest of society. The fact that they have lost the claim to wealth from their stock and bond holdings makes all the rest of us richer once the economy is again operating near normal levels of output.

Instead, we have the same Wall Street crew calling the shots, doing business pretty much as they always did. The rest of us are sitting here dealing with wreckage of their recklessness: 9.6 percent unemployment and the loss of much of the middle class’s savings in their homes and their retirement accounts.

And, here, with a remarkably similar conclusion given his different politics, is Scott Sumner:

Sometimes I like to daydream and imagine a scenario where Congress refuses to authorize IOR, TARP, and all the other initiatives used to bail out the banking industry. Bernanke would have had to go to the Fed and deliver the awful news:

Ladies and gentlemen, Congress won’t let us bail out the banks by any means other than good old-fashioned monetary stimulus. We tried hard to get authorization for a program that would rescue banks without also boosting AD, but those morons on Capital Hill won’t go along. I am afraid we have no choice but to do massive monetary stimulus, which unfortunately will boost NGDP growth.

Yes, they might have found that the only way to bail out the banks was to bail out the economy. Wouldn’t that have been awful!

The truth is that it is very difficult to know what would have happened in some parallel world where, say, McCain or Obama (or both!) had taken a firm stand against the bailout, and forced the Fed to come up with a Plan B. And as such, calculating the true cost of TARP is not simply a matter of counting how much of our money we got back.