In Tarpum Memoriam

Now that the spigot phase of TARP has come to an end, Felix Salmon has some wise words. Personally, I have conflicting feelings about TARP. It was an awful thing to do and I hate, hate, hate how it was done, but ultimately…yes…it was necessary and the right thing to do.

Felix writes:

TARP might have arrested the global panic for long enough that Bernanke’s policies had time to start working, but that’s about it.

That’s about it? I think that was TARP’s most important accomplishment—it gave us time. The ballgame changed once people knew there was some sort of backstop even if it was a dysfunctional one.

Let’s take a step back and remember that it wasn’t until 30 years after the Great Depression that Milton Friedman untangled what really happened. Policy makers have to move a lot faster than that. To paraphrase Donald Rumsfeld, you save the banking system with the policy makers you have.

The key yardstick to measure the effectiveness of the TARP program is, in my opinion, the TED spread—and make no mistake, that improved dramatically. Yes, I fully understand that the improved TED spread may have simply correlated with TARP and not have been caused by it. I get that.

The problem is that we don’t have a petri dish to run the economy through 5,000 different scenarios. Perhaps at some point in the distant future, some young economist will put all the pieces together and conclude that TARP was a terrible mistake. Until that happens, I see TARP as being 1 for 1.

I’m surprised at much of the outrage that people have about TARP. Not that it isn’t outrageous, but what the hell did they expect? When the market crashes, why do we expect policy makers to behave more reasonably? Of course they’re going to be craven and inefficient! That’s why they’re policy makers.

Felix blames TARP for “generating a broad-based mistrust of institutions: the government and the financial-services industry certainly, and the judicial system possibly as well.” Well…in my book, that’s a good thing.

The most recent estimate is that TARP will cost the taxpayers $29 billion. Let’s remember that last year, Goldman Sachs (GS) paid taxes of $6.4 billon, plus they kicked in another $2.5 billion so far this year. Should that be included in TARP costs? I don’t know; maybe, maybe not. But I do know that Goldman and many other banks are still in business, employing people and paying taxes. Without TARP, it’s quite possible they wouldn’t be.

In the end, I hope we never, ever have to do another TARP. But I’m pretty sure that my hopes won’t be the deciding factor.

Posted by on October 8th, 2010 at 12:07 am


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.