Very unpopular opinion here on FR but I absolutely believe TARP (as originally written by Paulson/Bernanke not the bastardized version from Congress) was the right thing to do. The financial system was melting down (it was a very scary time - I work in corporate finance and investor relation and do financial and economic forecasting. It was an incredibly volatile period in late 2008. Our forecasts were literally changing daily). Letting the banks go under would have been a disaster 1000x what we saw. Commerce would have stopped. Thousands of businesses would have gone under and 10’s of millions would have lost jobs. The Fed backstopping the banks restored faith in the credit system which is the lifeblood of economic activity.
Now, should the idiots who levered up with exotic financial products they didn’t understand go to jail? Absolutely. But to let the banks go under would have been economic suicide.
QE isn’t related to TARP. When the market demands liquidity how is it provided? When everyone is hoarding cash (i.e. Collapsing velocity) and the system can’t provide it what are the consequences? DEflation is exponentially worse than inflation.
The purpose of QE isn’t to restore trust. It’s to provide the liquidity demanded by the market.
I get what you’re saying and it’s easy in hindsight to call it differently. Perspective is hard to come by, especially in the midst of a crisis. My concern is that the meltdown didn’t occur in a vacuum. The economy didn’t just start in 2007/08, but was/is the result of bad fiscal and monetary decisions made by the selfsame leaders who are there today. They keep getting a second bite at the apple and getting it wrong. There’s an unresolved structural problem in the marketplace.
The FED chairs sound like financial advisors booking both sides of the trade: “it will blow up or it will just be going higher”. I’m not as impressed with our leaders as you seem to be. Neither Paulson nor Bernanke nor Yellin were taking steps to curtail the building risk to the financial markets. The status quo rules and the regulators are there to see that nobody important gets hurt.
Let’s accept that TARP had to happen, the markets had to be reassured. Few people realize just how big and critical the credit markets really are or how much nonbank credit gets created every day. That said we’ve seen over and over again, not just in this crisis, but every single one, that the wealthy insiders get covered while main street is left to swing in the wind.
As for QE one of the major reasons people are hoarding cash is the truth/rumor of QE. I don’t think it’s expanding liquidity, it’s simply holding the line as the bonds/MBS are traded for cash. Psychologically we expect a bloodbath and then a recovery as prudent, thrifty money reenters the market and captures value. That hasn’t happened. From bankers to average Joes Americans are still waiting for the other shoe to drop. That, coupled with Obama’s war on wealth, is what’s holding back the economy. 5-6% real growth sustained over time wouldn’t surprise me (turned loose the US economy would blow the doors off the rest of the world), but the unnaturalness of the government intervention is keeping people out of commerce.
It’s very hard for me to see which is causing the most damage, the giant financial bolder the FED is balancing or the destructive policies of the Obama Administration. Imagine if that TARP and other fiscal stimulus really went to rebuild infrastructure and not to line the pockets of Green tinged thieves and connected investors.
The arguments in favor of eventual interest rate increases coupled with the very real argument that inflation or taxes or both are going up is logical and scary. Wage stagnation is mainly driven by massive increases in health care charges offsetting wage gains. I’d like to see a deflationary cycle driven by increasing productivity gains. Debt and the assets securing it must come down. Housing remains a real anchor to job mobility. Might we not have been better off if the government had simply admitted that in certain markets the pricing isn’t ever coming back?
It’s a mixed up picture, but I agree with your assessment. We are in a typical recovery out of a credit collapse. It takes a long time to work that through the system. In the meantime our dynamic productive economy is producing jobs for which government school educated people aren’t properly trained. It’s at the margins with the marginal that we’re seeing the growth in stagnation. Welfare pays and that’s the wrong incentive.
Overall, I’m very optimistic and will not bet against the US economy. Not just because I am an American, but looking out across the world I don’t see a more dynamic economy or a people more ready to make the switch over to a fully 21st century economy. I believe like Julian Simon, that human beings are the ultimate resource. We’re already seeing the solutions to our major problems being brought to market.
In health, education and welfare the solutions exist. Get the right Congress and hold it for a generation and all this will seem like just a bad dream. I enjoy your thoughtfulness and erudite comments. Take care.
Perhaps( for those of us skeptics who wonder if the fire wasn't deliberately set)...the questions have never been answered, among those questions...
1) why did it happen?
2) was it deliberate?
3) who was responsible?
4) why aren't/weren't those "individuals" responsible punished(and not just the institutions through pocket-change-gov.-slaps-on-the-wrist)?
5) were the Fed oversight agencies ignorant...or compliant?
For those of us outside of the financial/institutional window looking in, it simply looked like a bunch of greedy bastards who used modern day techniques/technology along with creative(deviant)ideas, to pull off the greatest crime spree(s) of all time.
...then things got out of hand as more and more tried to get in on the caper.
All that manipulation and greed without care-one of how it would negatively affect so many others...those who were simply trying to go about their normal lives.
...many who will never recover, because there simply isn't enough time to start over.
But hey...at least somebody's being punished.