Reason has a really interesting interview with economist Garett Jones of George Mason University about TARP. The TARP program is often presented as a great success because it is said to have prevented the market from collapsing at a cost to taxpayers of only $19 billion. Here is what Jones has to say about it:
I’m willing to be pretty bold about this. There really wasn’t much new economic news about the state of the banks that came out when the stock market had its eight days of terror. What was coming out was the government’s ever-growing willingness to completely take over and micromanage the “too big to fail” banks.
When asked whether the primary cause of the market crash back in 2008 was TARP, Jones responds:
I think there’s a solid shot that it’s most of it. It’s at least a substantial part of it. I know that I’m in the minority here. It’s just me and John Taylor right now who are willing to say this openly.
But yes. The news that still doesn’t get enough attention is that the collapse happened after TARP was passed, not before. People have this story they tell each other where the economy was collapsing so we passed TARP. It’s closer to the truth to say the opposite.
Evidence:
When the House rejected TARP, the stock market fell 7 percent. When Congress eventually passed TARP, the stock market fell 40 percent. I know which of those two numbers I prefer. I don’t claim that the 7 percent was totally caused by the rejection of TARP. I don’t claim that all of the 40 percent was caused by the passage of TARP. But you know, seven versus 40—I’ll pick the smaller number of the two.
A few weeks after TARP was enacted, Jones floated the idea of “Speed Bankruptcy.” The basic idea is that, unlike what governments tend to do during bailouts, the cost of a bank’s failure and lost money should come from the people who took the risk in the first place, the bondholders. They would be generously rewarded if it worked out, and if it didn’t, they would share some of the pain.
Here is an interesting response to Jones by Karl Smith over at Modeled Behavior; he argues that “too big to fail” is not a policy but simply a reality. And here are some of John Taylor’s posts on evaluating TARP.