"If there's one thing that has unified Democrats and Republicans -- and everybody in between -- it's that we all hated the bank bailout. I hated it. You hated it." -- President Barack Obama, Jan. 27, 2010
"I don't oppose all wars. ... What I am opposed to is a dumb war. What I am opposed to is a rash war." -- Illinois state Sen. Barack Obama, Oct. 2, 2002
This week the watchdog of the Troubled Asset Relief Program, Neil Barofsky, submitted his quarterly review and testified before Congress. In England, former Prime Minister Tony Blair also testified -- for six hours under cross-examination -- at a widely anticipated inquiry into the Iraq War.
TARP and the war in Iraq, begun with bipartisan congressional support, are now unpopular. In both cases, proponents argued that without action, we risked greater danger. President Obama defends TARP, which he voted for in the Senate and has expanded as President. But he bemoans having inherited a war he called "dumb."
Under TARP, the federal government committed hundreds of billions of dollars to bail out financial institutions. But for this bailout, argued the Bush and Obama administrations, banks would stop lending, and our entire financial system faced collapse -- directly affecting all Americans.
Watchdog Barofsky, when asked last fall whether TARP was "working," said: "It really depends on your perspective. We were told by Treasury that the point was to increase lending. ... Today we hear that the purpose of TARP was to prevent systemic collapse." Lending has not increased, he said, but "it appears that we've avoided a total systemic collapse (emphasis added)."
Is TARP, then, a success?
Barofsky's report to Congress says that TARP can only be called a success if the program "is both managed well and its positive effects are enduring." Let's set aside the highly criticized management of the program.
Will TARP have "enduring positive effects"?
The argument for the bailout is that some institutions were "too big to fail." But Barofsky now says: "These banks that were too big to fail are now bigger. Government has sponsored and supported several mergers that made them larger. And that guaranteed that implicit guarantee of moral hazard. The idea that government is not going to let these banks fail ... is now explicit. ... In a lot of ways, the government has made such problems more likely. Potentially, we could be in more danger now than we were a year ago."
So did TARP save us?