Econintersect: Writing today in The New York Times, special inspector general for TARP Neil Barofsky says that the bank rescue efforts were successful but failed the country. He says the country did benefit from avoiding a financial system meltdown, but other measurements find the process had little merit other than saving the banking system.Barofsky writes:
Though there is no question that the country benefited by avoiding a meltdown of the financial system, this cannot be the only yardstick by which TARP’s legacy is measured. The legislation that created TARP, the Emergency Economic Stabilization Act, had far broader goals, including protecting home values and preserving homeownership.
These Main Street-oriented goals were not, as the Treasury Department is now suggesting, mere window dressing that needed only to be taken “into account.” Rather, they were a central part of the compromise with reluctant members of Congress to cast a vote that in many cases proved to be political suicide.
The act’s emphasis on preserving homeownership was particularly vital to passage. Congress was told that TARP would be used to purchase up to $700 billion of mortgages, and, to obtain the necessary votes, Treasury promised that it would modify those mortgages to assist struggling homeowners. Indeed, the act expressly directs the department to do just that.
But it has done little to abide by this legislative bargain. Almost immediately, as permitted by the broad language of the act, Treasury’s plan for TARP shifted from the purchase of mortgages to the infusion of hundreds of billions of dollars into the nation’s largest financial institutions, a shift that came with the express promise that it would restore lending.
Barofsky points out that the bailout package only benefited big banks, which are now 20 percent larger than they were before the crisis. It appears to him that the process has cemented a permanent too big to fail status for the big banks.
Treasury’s mismanagement of TARP and its disregard for TARP’s Main Street goals—whether born of incompetence, timidity in the face of a crisis or a mindset too closely aligned with the banks it was supposed to rein in—may have so damaged the credibility of the government as a whole that future policy makers may be politically unable to take the necessary steps to save the system the next time a crisis arises.
Source: The New York Times
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