TARP was not a successful program

Over at NetRight Daily, Adam Bitely explains that despite Robert Samuelson’s claims that TARP was a success it has set taxpayers up for future abuse because the market was not allowed to weed out irresponsible businesses:

Writing in the Washington Post, Samuelson claims that “[w]hen the entire financial system succumbs to panic, only the government is powerful enough to prevent a complete collapse.” Clearly, Samuelson has never taken an economics course.

First, when the financial markets tumbled in 2008, the correct reaction would have been to allow the financial system to naturally collapse and allow it to rebuild itself by reallocating resources to those entities that were best suited to do that. Instead, the government stepped in and provided the TARP fund, which propped up zombie corporations and companies that had mismanaged resources. Such activity allowed bad business practices to continue.

Second, the government does not exist to prevent businesses from failing. When the Founding Fathers designed the Constitutional system of government, they laid out a system that allows the American citizen to perform at his best with extremely limited government intrusion.
While Samuelson celebrates that this program did not cost the taxpayer as much as it was originally forecast to cost, he misses the key point that such programs should never exist in the first place. The only good cost of such a program is zero, and the only way to ensure that such a program does indeed cost zero is to never implement it in the first place.

As politicians in D.C. slap themselves on the back from supposedly “saving” the finance market, they should be blamed for staving off a free market correction. If politicians in D.C. wanted to ensure that the financial markets got back on their feet correctly, they should have stayed out of the collapse entirely.

Samuelson should read the wisdom that is offered daily from George Mason University economist Russ Roberts at CafeHayek.com. As Roberts stated, “remember that the cost of the TARP isn’t the cost to taxpayers. Even if banks paid back every single penny, the cost of the TARP is that it reduces current and future prudence.”

Dean Baker, co-director of the Center for Economic and Policy Research, also took apart Samuelson’s logic:

Samuelson apparently does not understand the idea of money carrying an opportunity cost.

Suppose the government lent me $1 trillion for 10 years at 1 percent annual interest. In the Robert Samuleson world, the government is earning a $100 billion profit on this investment ($10 billion a year for 10 years). Economists familiar with opportunity costs would instead see this as a huge loss to the government, since it is giving me an enormous loan at an interest rate that is several percentage points below the market rate.

We saw how this worked with the TARP when Warren Buffett reported earning twice the money on his investment in Goldman Sachs which was half of the size of the investment from Treasury. Buffett got the market rate of return on his investment, the difference was a subsidy from taxpayers to the shareholders and executives of Goldman. The same story was true with the other TARP loans, as well as the even larger amount of money lent through the Fed as well as the guarantees provided by the FDIC.

As I noted last week after TARP watchdog Neil Barofsky explained that the bailouts have likely left the concept of “too big to fail” as a permanent fixture in our public policy. That is the real damage done here. Whether or not TARP reaps a profit, and it won’t, is irrelevant because taxpayers are going to constantly be on the hook anytime some business or sector is deemed “too big to fail.”

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