The Case for and Against The TARP Bailout
Danielle Kurtzleben

June 1, 2011

Five reasons the controversial bailout program worked -- and five reasons it didn't

Chrysler has repaid much of its TARP money, GM is hiring again, and the financial sector is booming. Two and a half years after the Troubled Assets Relief Program was conceived, these are encouraging signs that the program my have helped avert disaster. However, despite the government's best efforts, the housing market remains anemic. Furthermore, many argue that the infusion of recovery funds further promotes bad behavior on the part of banks. So was TARP a win or a wash? Here are five arguments in the program's favor -- and the top five against it.

1) Economic antifreeze

In propping up major financial institutions, TARP provided relief from the immediate problem of frozen credit markets, according to James Gattuso, a senior fellow in regulatory policy at the Heritage Foundation, a conservative think tank: "It served a critical function in terms of providing liquidity at a time that it was needed to counter a panic in financial markets," he says. Doug Elliott, a fellow at the liberal Brookings Institution, believes that without government support of financial institutions, the financial crisis would have taken on far greater proportions. "The recession we had would have been substantially worse; millions of people would have been out of work," he says.

2) A government program that costs less than advertised

When initially conceived, TARP was intended to purchase or insure $700 billion of mortgage-backed securities, and initial lifetime costs of the program were estimated to potentially reach $300 billion. The program's aims and costs have evolved drastically, and current numbers show its final costs to be far lower. The most recent numbers from the Treasury Department estimate $475 billion in total commitments, and estimate TARP's lifetime cost at $49 billion.

3) Withdrawing money from the banks

The portion of the program specifically devoted to helping banks was particularly successful. The government invested $245 billion and has gotten $252 in repayments -- a profit of $7 billion. According to Elliott, the major reason for this is that the financial industry has recovered so well from the state it was in when TARP was passed.

4) Revving up the auto industry

Auto companies bailed out by TARP funds have recently shown new signs of health. In 2010, GM saw its largest profits since 1999, and the company has also recently announced 4,000 new jobs. In addition, Chrysler has paid back more than $10.6 billion of its $12.5 billion in TARP loans, prompting Treasury Secretary Tim Geithner to pronounce government efforts toward the auto industry as successful: "Because President Obama made the tough decision to stand behind and restructure the auto industry, America's automakers are growing stronger, making new investments, and creating new jobs today throughout our nation's industrial heartland."

5) Jobs, jobs, jobs

The Treasury Department says that its recovery initiatives, including TARP, have saved 8.5 million American jobs. In a July 2010 paper, Princeton University Economics Professor Alan S. Blinder and Mark Zandi, chief economist at Moody's Analytics, furthermore estimated that with no government response to the meltdown, 2010 U.S. GDP would have been 11.5 percent lower.

But the program is not without its critics. They point out that its housing initiatives have largely been ineffectual, and that it remains wildly unpopular with a public that resents bailing out institutions that nearly brought the U.S. economy to ruin. Here are five ways in which TARP has been a failure.

1) Little forestalling of foreclosures

The least successful area of TARP has been its housing initiatives. The Mortgage Loan Modification Plan, which sought to help homeowners stave off foreclosure, has barely made a dent -- of the $30 billion the government intended to spend on the program, just over $1 billion has been disbursed. In a December 2010 report, the Congressional Oversight Panel for TARP estimated that the program would prevent only 700,000 to 800,000 foreclosures -- a far cry from the three to four million that the program had originally hoped to avert. "The part of TARP that tried to help homeowners who were having trouble with their mortgages really never got off the ground in the way the administration wanted," says Elliott. Dean Baker, codirector of the progressive Center for Economic and Policy Research, also pronounces the program a disappointment. "There were a lot of promises made -- that it was going to help keep homeowners in their homes, that we'd see all of these modifications. By that score, it certainly failed," he says.

2) The wrong message

By preventing large institutions like Bank of America and Citigroup from failing, the government risked creating a problem of moral hazard -- that is, of promoting irresponsible bank behavior that might not occur without the prospect of future bailouts. Earlier this year, then the special inspector general for TARP, told a congressional committee that the bailout of large financial institutions promoted a "'heads I win, tails the government bails me out' mentality." Harvard University economics Professor Ken Rogoff agrees: "[The financial sector] certainly had a stressful period, but they came out of it with huge profits and huge gains," he says. Baker says that this has repercussions for the entire banking sector. "Lenders expect government to back them up; they're more comfortable lending to Citi or Goldman [Sachs] than to smaller banks or another borrower," he says.

3) The Fed did the heavy lifting

Baker says that Federal Reserve programs, such as providing low-interest loans to financial institutions, played an indispensable part in promoting recovery to the financial sector. "We had TARP and on top of that, we had pretty much open access to the Fed through the discount window and the lending facilities. So you had some very, very serious support for the banks," he says. Rogoff goes so far as to call TARP "symbolic." "The real honest truth is a lot of what was done was done through the Federal Reserve and was really risking taxpayer money through the back door," he says. "TARP essentially put a seal of approval on the general approach of the government to try everything to prop up the financial sector."

4) Toxic politics

While TARP's effectiveness is arguable, it is indisputably an unpopular program with voters. Indeed, the public deeply dislikes the program, even as it fails to understand it. In April 2010, a Pew Research Center poll showed that only 42 percent of the public believed that TARP helped to prevent a more severe economic crisis. A July poll by Pew also showed, however, that only 34 percent of people knew that TARP was enacted under President Bush, not Obama. "No politician is going to call for a revival of TARP. It really has been reviled by the public," says Gattuso. Elliott agrees, calling TARP "the best large federal program ever to be despised by the public." He explains, "The public made up their mind early on. Most politicians won't even try to tackle [TARP]," for fear of being associated with a program the the public roundly rejects. GOP presidential hopeful Tim Pawlenty, for example, criticizes TARP on the campaign trail, while fellow hopeful Mitt Romney is qualifying his past TARP support.

5) What worked could have worked better

Rogoff believes that the government could have reaped far greater rewards from TARP by taking a tougher stance toward financial institutions. He calls the $21 billion that the government expects to recover from its bank programs "chump change, compared to what they might have gotten, had they insisted on an equity stake in the financial firms." This greater stake would have given the government far greater returns when companies like Bank of America and Citigroup recovered profits shortly after TARP's inception.

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