The True Cost Of TARP

I received this email from the Mercatus Center’s Financial Working Group which has some excellent comments on TARP. Click on the link to Garett Jones’s interview at Reason on the “true legacy of TARP.” He makes some good points.

What Lies Beneath: The True Cost of TARP

In the last week, a rash of commentary has attempted to assess the true cost of Troubled Asset Relief Program (TARP). Many point out that in the final calculation, the budgetary cost may very well be less than $19 billion, far lower than the initial $700 billion commitment, or the $247 billion initial projected cost – an unheralded success. But the true economic cost may be far higher.

In a recent interview, FMWG member Garett Jones points out that the true legacy of TARP may be the stubborn entrenchment of a “too big to fail” regime. As he puts it, “the big message of the financial crisis is that you want to become too big to fail.” Indeed, recently resigned Special Inspector General for TARP, or “TARP cop,” Neil Barofsky said in a recent Congressional hearing: “[TARP] has increased the potential need for future government bailouts by encouraging the ‘too big to fail’ financial institutions to become even bigger…therefore increasing their ultimate danger to the financial system.”



14 comments to The True Cost Of TARP

  • Yeah it is called “moral hazard”

  • Linus Huber

    Tarp as many other actions of the past 3 years undermines the basis on which Western society is built on, namely the spirit of “the Rule of Law”. Who does invest/speculate MUST be able to keep the gains and MUST be made to eat any losses. If this most important aspect is not safeguarded by governments, all that is left is insecurity and uncertainty.
    This will come to haunt those people in charge over the coming years and for good reason.

  • Gracius Linius

    The entire point of TARP is that ‘moral hazard’ was a cost that had to be beared in order to prevent systemic financial collapse and economic atrophe.

    • dd

      oh dear. that is precisely what the gov’t and mainstream media wants you to think. hook, line and sinker.

    • Keith Weiner

      Moral hazard is a “cost” that cannot be borne because it grows exponentially with each incremental sign of the willingness to bear it. Example: your friend gambles in Las Vegas and loses $100. OK no big loss, you offer to pay him $100. So he goes and gambles again and loses $200. And again you pay him. What has he just learned and more importantly what will he do next?

      People make choices based on the outcomes they expect under the rules as they understand them. If the rule is: I keep any gains but society pays my losses, why not lever up 100:1 and speculate on cotton futures??

      You can’t perform cost-benefit analysis on questions of morality.

      • dd

        yes Keith, i agree. my assumption is that Gracius Linius grasps the concept but believes the alternative would have been worse.

        my opinion is that the Fed was already on the job and that TARP was unnecessary. as i see it, there was no political will to rescue lehman, however the politicans did not foresee that ramifications of their inaction and thus hurriedly instituted TARP to show they were “doing something” about the problem. and while it may have had a psychological effect, it was hardly a material injection relative to the size of the banking industry’s collective balance sheet.

        and what are we left with? AIG and Government Motors. puke.

    • Keith Weiner

      Speaking of which, guess what the UK and Netherlands governments did to their own people? That’s right, they looted all of them to pay for the gambling losses suffered by some of them.

  • I term “moral hazard” is too confining. The true cost is an economic hazard. Imagine the following: You have a finite amount of resources (coal, iron, salt, etc.). You decide to start a society. In that society individuals form coalitions to barter with and put those resources to productive uses. One coalition squanders its resources and produces nothing of value. You decide to forcibly take resources (10 tons of coal, 5 tons of iron, 2 tons of salt, etc.) from everyone else in your society and give it to the squandering coalition who (predictably) squanders those too. You *could* say the cost of the 17 tons of resources, but I think Jeff’s point was that it’s not just those. It’s what *could* have been done with those resources if they were allowed to stay in more responsible hands. Not only are you out the negative of the forced allocation, but the lack of positive if the market were to determine where those resources were best used. Plus you now have a precedent that encourages squandering which, if followed to its logical end, results in collapse of your society if not corrected. So the real consequences aren’t a “loss” of 17 tons of stuff. They’re much, much more dire.

    • That should have read, “I *THINK THE* term ‘moral hazard’….”

    • Keith Weiner

      I agree with your point but I don’t think “opportunity cost” is a valid concept.

      Otherwise, you have to admit that your own personal opportunity cost is billions of dollars! You *could* have spent your time developing a massive Internet business, but you did not. :)

      • dd

        given the level of capital destruction by the banking/real estate sector, i think opportunity cost is the least of our concerns.

  • And also should have read, “…say the cost *WAS LIMITED TO* the….”

  • Keith, Matt, both of you are describing the broken window theory of Bastiat. What is seen is the effect of the policy(TARP) but what is unseen is the result of the policy. There is no doubt that the unseen will plague us in ways we cannot describe. Accordingly, the term “opportunity cost” is a misnomer in its description of TARP.