WaPo on BHO criticisms of TARP: "The case against TARP-bashing"

Necessary, Not Evil. WaPo Editorial
The case against TARP-bashing
The Washington Post, Friday, February 27, 2009; Page A16

Is President Obama a TARP-basher? He sounded like one on Tuesday, telling Congress that he had been "infuriated" by the Troubled Assets Relief Program's "mismanagement and the results that followed" under the Bush administration. He promised that, on his watch, banks "will have to clearly demonstrate how taxpayer dollars result in more lending for the American taxpayer" and won't be allowed to pad bonuses or redecorate their corner offices.

In some well-publicized cases, TARP recipients have behaved in the style to which the boom had accustomed them. The latest example was Northern Trust, a recipient of $1.6 billion in TARP funds, which flew hundreds of employees and clients to a Southern California golf tournament. More substantively, TARP's congressional oversight panel accuses the program of overpaying for its stakes in the banks by $78 billion. And then there are those who want to know why government capital did not trigger an immediate burst of lending. "Start loaning the money that we gave you. Get it on the street!" Rep. Michael E. Capuano (D-Mass.) ordered bankers at a recent House committee hearing.

The total TARP pot is $700 billion. So far, $281 billion has gone to prop up banks and insurance giant AIG. General Motors and Chrysler got $24.8 billion; $50 billion has been allocated for Mr. Obama's homeowner support plan and $100 billion to help the Federal Reserve provide liquidity to credit markets. Every nickel spent on undeserved perks is galling, but, as a percentage of the bailout, blatant corporate excess probably accounts for very little.

Undoubtedly the government paid more for shares in banks than private investors would have, thus conferring a huge subsidy. But that was the point. Last fall, when the Bush administration announced TARP, the financial sector was melting down. Private investors were spooked; there was no time for the government to haggle. The resulting subsidy should be seen not as a rip-off but as the cost of a valuable public good: economic stability.

There are two sides to the lending story as well. Yes, some banks are using the funds to shore up their balance sheets. But they are being pressed by regulators to avoid excessive credit risk -- which is what brought on this crisis. There is much debate as to precisely how lending changed after TARP. Analyst Richard Bove of Rochdale Securities LLC found that lending by the 13 largest TARP recipients went up 4.7 percent between the third and fourth quarters of 2008.

A fair assessment of TARP and its results is important because Mr. Obama himself will soon be seeking additional funds for bank capitalization. What's interesting is that his plan does not require banks to increase lending per se, as he implied in his speech, but to show that they are lending more than they would have without government aid. That is, the details of his policy are more nuanced than his rhetoric. Indeed, once his populist riff was over, the president reminded Congress that fixing the banks, though unpopular, is a precondition of economic recovery. "In a time of crisis, we cannot afford to govern out of anger or yield to the politics of the moment," he said. Sound advice.