Happy Birthday, Bank Bailout! | Mark A. Calabria | Cato Institute: Commentary

Happy Birthday, Bank Bailout! | Mark A. Calabria | Cato Institute: Commentary: "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.

The statutory language of TARP repeated talk about protecting homeownership, home values, and jobs. One need not reproduce charts for these variables. We all know how weak they have been. This of course should not really be a surprise. TARP did nothing to change the fundamentals of supply and demand in the housing market, or in the labor market."

"despite TARP's goal of cleaning the banking system of bank assets, there are more bad assets than ever. While TARP, of course, did not cause those bad assets, it was supposed to reduce them.

The real costs of TARP are likely not going to be felt for years, until the next financial crisis. In rescuing the financial system, TARP has created the expectation that in a moment of crisis, the government will throw money at the problem, reducing the incentive of market participants to reduce their own risk exposures."