Five years ago, the federal government bailed out the banks. Was it worth it, and what was lost?
Timothy Massad, overseer of the Troubled Asset Relief Program, told a Little Rock crowd at the Clinton School of Public Service Sept. 26 that the money the federal government spent on TARP – for the banks, AIG, and the auto industry – has been largely paid back. In return, he said, the economy and financial system were saved and a second Great Depression averted.
In remarks available at clintonschoolspeakers.com, Massad recalled what happened in the early days of the 2008 crisis. Policy makers had only hours to make decisions or risk a financial meltdown. The situation was bleak.
"Panic was spreading," he said. "The stock market dropped by more than 770 points in a single day, and the financial wildfire was quickly spreading far beyond Wall Street. … And so for the first time in generations, Americans were actually starting to question the safety of their money in banks."
Remember the scene in "It’s a Wonderful Life" where George Bailey reasoned with the townsfolk and prevented a run on the Bailey Building and Loan? That wouldn’t have happened in real life, Massad said, not when billion-dollar transactions can be completed with a mouse click. There was a real threat that the financial system would collapse.
So the rescue began. Freddie Mac and Fannie Mae received a total of $187.5 billion, according to the website ProPublica, though not from TARP. AIG received $182 billion from TARP and the Federal Reserve, according to Massad. Banks holding 98 percent of all the assets in banks across the country took $245 billion. Those include 650 regional and community banks, including 12 in Arkansas. Then there was the auto bailout and other forms of government assistance.
In contrast, the National Cancer Institute, the nation’s main cancer research agency, spends about $4.89 billion a year.
The system stabilized. We still have an economy that works, however sluggishly. The financial system began repaying the government. According to Massad, if you count all the different sources of bailout money, "taxpayers are likely to realize a gain."
So the banks were saved, a global depression was averted, and it didn’t cost much, if anything. Who could criticize that?
Let’s give it a shot.
The folks whose greed and incompetence nearly toppled the economy are more powerful than they were before. The biggest banks are bigger than they were in 2008. According to the Independent Community Bankers of America, the top three banks now control more assets than 7,000 community banks across the country. Meanwhile, not a single Wall Street executive has gone to jail.
While taxpayers may come out ahead on the bank bailout, the entire process has cost us something more important: a principle. For capitalism to work, people must have both an incentive to succeed and a disincentive to fail. Rags-to-riches stories must be possible, but there also must be the threat of going from riches to rags. Those in the financial industry have every reason to believe that last rule doesn’t apply to them. They’re too big to fail.
Massad in general acknowledged that criticism, and this column is not meant to criticize him. TARP, he said, revealed problems that should be addressed. He said TARP put out the fire that threatened the neighborhood caused by a man smoking in bed. It wouldn’t have made sense to let the neighborhood burn down to teach people to smoke somewhere else.
If we must accept that TARP was the only fire extinguisher available, then it did its job. The bank bailout put out the fire. But neither should the rules ensure that the guy who burns down the neighborhood is handed the keys to a bigger home along with a new pack of cigarettes.
Steve Brawner is an independent journalist in Arkansas. His email address is email@example.com. Follow him on Twitter at @stevebrawner.