The Washington Post is unhappy that support of the TARP appears to be a liability on the campaign trail. After all, it tells readers:
“Then-Federal Reserve Chair Ben S. Bernanke and Treasury Secretary Henry M. Paulson declared it indispensable to prevent another Great Depression.”
Yep, that would be Henry M. Paulson, who was CEO at Goldman Sachs before taking the job as Treasury Secretary. As far as Chair Bernanke’s assessment, it would be interesting to hear why he didn’t explain that the Fed single-handedly had the ability to keep the commercial paper market operating, until the weekend after TARP passed.
While the initial downturn almost certainly would have been steeper had Congress not passed the TARP and we allowed the magic of the market to sink Goldman Sachs and the other Wall Street banks, it is absurd to claim that this would have led to another Great Depression. We know the trick to get out of a Great Depression: it’s called “spending money.”
It took the massive spending associated with World War II to finally lift the U.S. economy out of the last Great Depression, but if we had massive spending on infrastructure, education, health care and other domestic needs in 1931 rather than 1941, we would not have had a decade of double-digit unemployment. Without the TARP and the Fed’s bailouts, we could have instantly reformed Wall Street and recreated a new banking system out of the wreckage which would be focused on serving the real economy.
It is also worth pointing out the absurdity of the claim that “we made money on the TARP.” We lent the banks money at way below the interest rate they would have been forced to pay in the market at the time. Since the rate was higher than the interest rate on government debt, supporters can say we made money, but it’s not clear why anyone should care. It was nonetheless an enormous subsidy to the Wall Street banks.
We could have also lent money at the same interest rate to Dean Baker’s Excellent Hedge Fund, which would have invested in the S&P 500. Dean Baker’s Excellent Hedge Fund would then have made an enormous amount of money at the taxpayer’s expense, but the editorial board at the Washington Post would undoubtedly tell critics to shut up, since the government made money on the deal. Makes good sense, right?
There is one final irony worth noting. This editorial appears right under the one denouncing Bernie Sanders’ “facile” proposals. The original TARP proposal was 3 pages, with most of the ink devoted to saying that no one could sue Treasury over how it spent the money. The package that was eventually approved was more than 700 pages. Furthermore, the initial proposal was for buying devalued mortgage backed securities (MBS) (“troubled assets”) from banks.
In fact, Treasury never bought any of these MBS from the banks. It instead gave relief in the form of purchases of preferred shares of stock. Given how far removed the original proposal was from what actually happened, it seems that Mr. Paulsen’s initial plan certainly would merit the Post’s “facile” award. For some reason that term was never used on the Post’s opinion page.