Published by the Students of Johns Hopkins since 1896
November 30, 2021

It's time to stop harping on TARP

By KAUSHIK RAO | February 29, 2012

In 2008, the Federal Reserve decided to bail out multiple financial firms through the $700 billion program known as TARP (Troubled Asset Relief Program). TARP was met with an understandably high amount of criticism and opposition. Many felt that it was a gift to the banks that had recklessly caused the financial crisis, and that it would cause "moral hazard" within the financial industry, since banks would believe that the government would always bail them out.
While TARP was a handout to the financial sector, we cannot ignore the fact that it was a necessary act that the federal government needed to undertake. If TARP had not been passed, we would have seen a systemic failure in the U.S. economy, which would have well caused a second Great Depression in the U.S. and around the world.
TARP stabilized the American economy and set a platform for future growth in America. In fact, out of the $700 billion that was loaned out, the Federal Reserve returned a profit of over $25 billion. Just this week, the Federal Reserve sold off its assets in AIG's mortgage backed securities for a $2.8 billion dollar profit. This was a profit for the taxpayers and a testament to the success of TARP. TARP can even be used as a model for other countries that face risks of systemic failure as well. It makes much more sense to keep liquidity in the financial markets than to allow for a bank to fail.
The financial system of America is set up as a peripheral network of firms. Each financial firm will hold accounts in every other financial firm. Therefore, if one bank goes bankrupt, all of the other banks are negatively affected because their holdings in the failed bank are wiped out. This is exactly what happened when Lehman Brothers was allowed to fail. Every other major bank on Wall Street was on the verge of collapse. Letting Lehman Brothers fail was a mistake, and, had we saved Lehman, it is very likely that the financial crisis would not have blown up into as large of a problem.
When Lehman failed, the credit markets immediately froze, and all short term lending was halted. This prevented businesses from taking out payroll loans to pay employees. Instead, the credit markets would have been fine if Lehman were rescued, and even though we would have had to still bail out every other bank, we would not have seen the Dow plunge more than 7,000 points, and we would not have incurred such a severe recession. We would have had a significantly smaller recession that would not have cost us as many American jobs.
Thus, America should be very content with TARP and its effect on the American economy. It staved off what would have been the worst economic plight since the Great Depression. It also put us on this path to economic recovery in which our gross domestic product has continued to grow, and the stock market has made a recovery from its lows in 2008. With Greece and other Eurozone countries literally up in flames over their economic crises, the U.S. has been able to avoid outright calamity. And most importantly, TARP has succeeded in restoring Americans' faith in the U.S. economy.

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