University of Chicago economist Casey Mulligan writes an attack on the controversial program last fall to inject equity into the banks using TARP funds, arguing that a recent government report [PDF] confirms that it did not work. Unfortunately, his selective quotes and out-of-context citations undermine his point -- not to mention his credibility -- and confuse what the Special Inspector General of the Troubled Asset Relief Program is trying to say.
Mulligan writes as if this was a look at whether or not the TARP program functioned as desired, but that's not what SIGTARP is examining at all. The report looks at why and how federal regulators chose the first nine banks that received capital injections, particularly with regard to the public interest in the merger between Bank of America and Merrill Lynch. The report concludes that the officials acted in good faith in making their decisions and initiating the TARP programs, but did not adequately represent to Americans the health of the banks in question. That is, to avoid a panic, they suggested that all the institutions were healthy when some were clearly not, and when Mulligan selectively excerpts the quote "lending at those institutions did not increase," it's clear from the context that the report refers to the initial period between the initial injections in November and actions taken a few months later to further shore up Bank of America and Citigroup, not the program's overall success:
Treasury and the TARP program lost credibility when lending at those institutions did not in fact increase and when subsequent events -- the further assistance needed by Citigroup and Bank of America being the most significant examples -- demonstrated that at least some of those institutions were not in fact healthy.
The report goes on to hedge about whether officials should even talk about the health of institutions at all, but concludes that more accuracy is required to help preserve trust.
Does the report touch at all on whether or not the TARP program actually worked, overall? Yes, actually. Discussing the freeze in the credit markets, the report notes that the the key measure of credit market reflects improvement, if not direct causation, which may be impossible to determine:
The spread reached a historical high of 341 basis points on October 13, 2008, signaling a severe disruption to the interbank market. Since reaching this high in mid-October, the LIBOR-OIS spread has fallen sharply, indicating that the credit markets, although still not at normal levels, are now working better than before the government capital injections.
None of this means that TARP was well-executed or planned, or that it restricted the actions of the banks enough (it was none of those things). TARP did, however, help forestall a disastrous panic when other tools were not available. Mulligan's conclusion that the program was "doomed to failure" is certainly an exaggeration and not reflected in this report.
-- Tim Fernholz
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