Economics: Why Tarp Has Been a Success Story

It isn't often that the government launches a major program that achieves its main goals at a tiny fraction of its estimated costs. That's the story of TARP — the Troubled Assets Relief Program. Created in October 2008 at the height of the financial crisis, it helped stabilize the economy, using only $410 billion of its authorized $700 billion. And most of that will be repaid. The Congressional Budget Office, which once projected TARP's ultimate cost at $356 billion, now says $19 billion. This could go lower.

You would hardly know.

Almost everyone loves to hate TARP. It's a favorite political sport of liberals, conservatives, Republicans, Democrats — and the public. A Bloomberg poll last October asked how TARP had affected the economy. Forty-three percent of respondents said it weakened the economy; 21 percent said it made no difference; only 24 percent said it helped, with 12 percent unsure one way or another. Commentators in newspapers from the Wall Street Journal to the New York Times disparage TARP.

Wrong.

One lesson of the financial crisis is this: When the entire financial system succumbs to panic, only the government is powerful enough to prevent a complete collapse. Panics signify the triumph of fear. TARP was part of the process by which fear was overcome. It wasn't the only part, but it was an essential part. Without TARP, we'd be worse off today. No one can say whether unemployment would be 11 percent or 14 percent; it certainly wouldn't be 8.9 percent.

One common allegation is that TARP will encourage more reckless risk-taking because big financial firms know they'll be bailed out if their gambles backfire — a problem economists call moral hazard. Bankers keep profits but are protected against losses, which are assumed by the public.

This is a serious issue, but TARP's legacy is actually the opposite. During the crisis, investors in banks and financial institutions suffered huge losses. It wasn't predictable which institutions would survive and which wouldn't — or on what terms. The same would be true in the future. Indeed,

For more, see Why Tarp Has Been a Success Story by Robert J. Samuelson, March 27, 2011 at The Washington Post.