Fresh from inauguration in February 2009, President Barack Obama faced an ongoing financial crisis. Something had to be done, and after the debacle that was obtaining the initial TARP funding, he knew there was little stomach for it Congress. Matt Yglesias walks you through where he went from there in this post, and you ought to read the whole thing. The long and short of it is that we ended up choosing a less optimal policy, because people were so angry about bailouts, and because Congress -- and the incentives of political actors therein -- drastically increased the challenges of implementing a better policy.
The downside of [the regulatory forebearance we've seen so far] is that it takes much longer to work, needlessly prolonging the massive suffering throughout the country. Another downside ... is that it undermines the effective of loose monetary policy, needlessly prolonging the massive suffering throughout the country. A third downside ... is that it's wildly more favorable to the people who owned the banks, in a way that creates a massive problem of injustice.The upside, however, is that you don't need to ask congress for additional bailout money. And, indeed, the public at large will regard this option as superior to a soft-on-bankers “bailout.” But at the very same time the bankers themselves will recognize that forbearance is actually a much softer policy than the unpopular “bailout” alternative.
As with our current economic stimulus plan -- the Fed's new efforts at aggressive monetary policy -- the president has taken a lot of flack for crafting second-best policies because of congressional dysfunction.
-- Tim Fernholz
