Sunday marks the two-year anniversary of President Bush signing the “Emergency Economic Stabilization Act,” better known as TARP (the Troubled Assets Relief Program).
I suspect the occasion will bring forth a loud chorus proclaiming that TARP saved Western Civilization as we know it, or at least prevented another Great Depression. Just as economists still debate the impact of the New Deal, it is a safe bet that economists will be debating the effect of TARP for years to come.
Any honest discussion of TARP’s impact should recognize that it is simply impossible to give a definitive answer to “did TARP save our economy?” Economics lacks the sophistication to empirically provide an answer to that question. Economics does not have the luxury of running a controlled experiment on the macroeconomy. There was a lot going on at the time. Parsing out the various impacts is quite difficult. For instance, I believe it is clear that the stock price received by the Treasury for various TARP banks is inflated by a “too big to fail” premium. So while we see the benefit of this guarantee, its costs are much harder to capture. And of course any discussion of benefits without an accounting of costs is at best misleading, if not outright dishonest.
An admittedly unscientific but useful first approximation of any government program is to ask, did such program change an underlying trend? One of the rationales offered for TARP was that it would “re-start” our credit markets. If TARP did help the credit markets, then its impact should show up in the amount of credit outstanding.
However, consumer credit peaked several months before the creation of TARP and seemingly continued a relatively smooth trend downward. Would that trend have been worse without TARP? Maybe. But since it appears that the trend did not change much at all, I believe the burden is on the program’s proponents to prove it did.
Another objective of TARP was to “restore confidence.” The idea was that if the American public and the financial markets saw that the government would do and spend whatever was necessary, calm would return. Interestingly enough, the first consumer confidence reading after TARP passed was lower than the measure taken just before its signing. While consumer confidence did start to improve in the beginning of 2009, one would have expected TARP’s impact on confidence to have been felt sooner rather than later.