Douthat: The Great Bailout Backlash

“TARP may have saved the United States from 15 percent unemployment, but it also implicated our government in the kind of crony capitalism you’d expect from a banana republic. If it was necessary, it was also un-American. If it worked, it did so while doing grievous damage to the credibility of Wall Street and Washington alike.”

October 25, 2010

The Great Bailout Backlash


Nothing in this election season, no program or party or politician, is less popular than the Troubled Asset Relief Program of 2008 — a k a the Wall Street bailout. No policy has fewer public figures willing to defend it, and fewer Americans who believe it worked. No issue has done more to stoke the fires of populist backlash, and the rage against elites.

It was TARP that first turned Tea Partiers against Republican incumbents, and independents against Washington. It was TARP that steadily undermined Barack Obama’s agenda, by making activist government seem like a game rigged to benefit privileged insiders. And it is TARP that’s spurred this campaign cycle’s only outbreak of bipartisanship: as of September, Politico’s Ben Smith noted recently, the two parties had combined to spend about $80 million on attack ads that invoke the bailout, with the Democrats alone accounting for $53 million of that spending.

The question is whether the program’s extraordinary unpopularity is justified. Few elected officials may be willing to argue for the bailout, but plenty of policy wonks will make the case (from the safety of their think tanks) that the Wall Street rescue package is actually “one of the most unfairly maligned policy initiatives of all time,” as the Center for American Progress’s Matthew Yglesias recently put it.

This case was strengthened by the news that the bailout might actually end up costing the taxpayer less than $50 billion over all, rather than the $700 billion originally set aside to pay for it. Moreover, it’s the auto bailout, which the TARP funds eventually underwrote as well, that’s likely to end up being responsible for the bulk of these losses. As it stands, the federal government may actually end up turning a modest profit on the money injected into Wall Street’s failing banks.

Given what seemed to be at stake in the fall of ’08, TARP’s defenders argue, that doesn’t seem like such a bad bargain: the bailout may have averted a Great Depression, and it didn’t end up costing very much at all.

Or at least it didn’t cost much if you accept that the ends of public policy justify the means. But of course it was the means of TARP, not its final impact on the country’s balance sheet, that made it so unpopular.

The bailout became law because the legislative branch was stampeded with the threats of certain doom. It vested unprecedented economic authority in a single unelected official, the secretary of the Treasury. And it used public funds to insulate well-connected private actors from the consequences of their recklessness. Its creation short-circuited republican self-government, and its execution created moral hazard on an epic scale. It may have been an economic necessity, but it felt like a travesty nonetheless.

This is why it should be possible to both sympathize with the politicians who voted for the bailout and welcome their rebuke at the ballot box. Faced with extraordinary circumstances — wars, natural disasters, economic crises — political leaders will always incline toward a blunt utilitarianism, in which the need for stability trumps more high-minded ideals. But after a crisis has passed, it’s immensely important that the ideals reassert themselves, so that the moral compromises made amid extraordinary times aren’t repeated in ordinary ones as well.

This point is starkly obvious in wartime. It was understandable, if not necessarily laudable, that Harry Truman used the atomic bomb against Japanese population centers to end years of global total war. But it would have been appalling if the memory of Hiroshima and Nagasaki hadn’t created a taboo around the use of nuclear weapons that endures unviolated to the present day. Likewise, the Bush administration’s decision to waterboard Khalid Shaikh Mohammed in the wake of 9/11 was far more defensible than the attempt, by many administration apologists, to insist that waterboarding raised no moral or legal difficulties at all, and should be a routine part of our interrogation repertoire going forward.

What’s true in wartime can be true in economic policy as well, even if the stakes aren’t life and death. TARP may have saved the United States from 15 percent unemployment, but it also implicated our government in the kind of crony capitalism you’d expect from a banana republic. If it was necessary, it was also un-American. If it worked, it did so while doing grievous damage to the credibility of Wall Street and Washington alike.

So it’s a healthy and necessary thing that our first post-crisis election has been defined by a groundswell of anti-bailout outrage. This no doubt seems unfair to the politicians who may lose their jobs (or have already lost them) for doing what they felt they had to do. But it would be an infinitely worse sign for America if the present backlash hadn’t materialized at all.

11 Responses

  1. DyingTruth

    This is the one area I disagree with Neil. The investors lend money to banks – the banks lend money to us by the mortgage loan. The investors are not in the business of granting contract mortgage loans to the public – and cannot be called the lender/creditor. Only indirectly do investors “fund” the loans – by their funding to the banks – and investors in MBS do NOT recoup investment by foreclosure recovery.. .

    But – agree with you about judges and courts. Many of the default loans are now with the government. Judges and courts are Judiciary Branch of the government system – and, they have lost their independence.

  2. Still no one else sees that the inherent conflict of interest is the main problem. Let me simplify, Neil has been saying for soooo long that the investors are the actual “lenders”. Now we know that the investors are Public Employee Pension Funds (i.e. Judges, Police, Sheriffs etc..), so basically the Judge foreclosing on you, the Sheriff evicting you THEY ARE YOUR LENDER. Am I the only one that sees the problem here?

  3. Lowell Dale Young,

    TARP bailed out the wrong parties. Paid back?? by what means – more accounting gimmicks?

  4. Agree with Lucy – who agrees with leapfrog post.

    The banks face far more liability from counter-parties, as far as dollar amount, than they do from homeowners. This is the reason for government concealment and protection.

    We are meaningless in the scheme of it all.

  5. leapfrog,
    thank you.

    Everyone should read it.
    Excellent !! Reggie middleton nails it !!

    Derivitives, Derivitives, Derivitives.

  6. Mr. Douthat misunderstands why it is that “only $70 Billion” was needed. The banks are fully paid by virtue of the credit-default swaps, which insured their exposure. When AIG received its $180 billion it “same day” issued payments to its counter-parties.

    What is now happening is the second wave of the fraud. The Banks take the position that the “Notes” are not Paid by the original Obligors, the homeowners, so they “foreclose” to gain possession of the property so that they can re-sell it to their benefit. Never mind that the Notes are actually paid by the insurance proceeds from the CDS. And that is why the “Banks” will have large earnings: the Courts so far have let them get away with this self-enriching argument. Reason: the Judges in the Courts simply do not understand the mechanisms by which Wall Street did this swindle. It is a massive transfer of wealth unparalleled in the entire history of the planet. And, note specially, it is being perpetrated by about 3,000 or so New Yorkers – a very small group.

    And that is why AIG and AMBAC insurance companies should have been placed into bankruptcy: it would have vacated the CDS obligations, and forced true accounting inside the Banks. then let them be taken over by the FDIC and broken up, and we have a healthier banking system to emerge. the current model is just too rife with fraud to be sanguinely propped up further.

  7. Who believe that the recession is over , and we will
    never have 15 % unemployment ?
    I had in September the worst month in 24 years in
    my business , and the October does not look better.
    I dont make money with Wallstreet. Tampa Bay
    has already 12.2. % unemployment .

  8. Yeah. What difference is there between Democrats hollering threats of “Certain Doom,” if we don’t pass TARP and the Republicans hollering Weapons of Mass Destruction?

  9. Ross Douthhat,

    Yes, but….. Your objection to the TARP ” bailout” is by and large not the (misinformed) objection of most of the electorate. They have been led down a path ignoring that TARP was primarily loans that have been and are being paid back, with interest. They have been led down the path that TARP is a massive overspending by the federal government that grossly increases the national debt. Few national commentators have rebuked these false paths. Many congressman may be defeated because of the false impression created by the opposition across the aisle. Few Republicans candidates have adoped your objection to TARP, but instead attack TARP because, it is claimed, it is a huge loss and waste of tax dollars. So, does the ends of voting out TARP supporters (which result you seem to defend) justify the means?

  10. A big hat on an empty head. Imagine someone enamored with politics this much to ignore the story for the glamour.

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