No matter if a political system is a dictatorship or a democracy, every debate that concerns the public as much as Secretary Paulson’s bailout plan will contain some ideological elements. The American search for an effective rescue package to weather the financial crisis can’t be an exception. But this is a blog, this post is just a monologue, and I can try to be as unideological as my wits allow. Is the Troubled Asset Relief Program (TARP), to be financed with 700 bn US-Dollars, an efficient and reasonable approach?
The question if it meets everyones’ standard of social equity shouldn’t be at the center of such considerations. Even for just one reason alone, this aspect would make little sense. After all, it took two parties for each subprime mortgage contract – creditors (the “big shots”?) and borrowers (“common people”?). In many cases, the borrowers weren’t exactly judgmental either (to put it mildly), and aren’t they grown-ups? When many potential borrowers and would-be home owners went for the biggest amount at the “best” (i. e. easiest) possible conditions, it became hard for any bank to be a saint, while competitors struck the deals. For sure, it would be wrong to make decisions with such far-reaching implications as TARP with the motivation to see a huge ostracism within the financial world. The costs of such righteous indulgence could be way out of proportions.
Equity questions have to arise when governments provide help to whoever - usually based on tax money. They also have to arise in the current TARP discussion. But if the latest edition of the Economist (September 27) publishes accurate numbers, concerning the gross fiscal cost in per cent of GDP, America would fare better with TARP, than Finland, Mexico, and above all Japan and South Korea with their bail-outs from 1991 to 1997. And it is hard to imagine how anyone who considers the welfare state an accomplishment should be happily leave the crisis to itself, with the (more or less) foreseeable effects on home owners, employees, and society in general.
Yet I’m getting the impression that both the debate on the electronic media, plus the savvy Economist, leave too many questions open. I hear too little about the possible or foreseeable costs of leaving the crisis to itself. And some of the Economist‘s arguments in favor of TARP and against other options make me wonder. Stuff like this:
Why buying assets, rather than injecting cash directly into the banking system? This could discourage private investors, says the Economist. That may be so – I can’t judge that. But the second argument against this suggestion sounds dubious: “.. banks might not volunteer to sell equity to he government before they reach death’s door (…) In any event, the Treasury plan could be flexile enough to permit such capital injections.”
If such stubbornness among bankers is likely, one has to wonder if things are really as serious as Secretary Paulson and Fed Chairman Bernanke painted them in Congress. Or, if the stakeholders in this crisis are still not ready to act in a responsible way. That doesn’t speak for a long-term learning effect from the crisis. What are the costs if state intervention after every excessive spate of speculation encourages more of the same irresponsible behavior? Is inaction really more dangerous than action, in the long run?
The Economist, despite all the laudable warnings of its own against unchecked financial manoeuvring during recent years, seems shy to answer such questions now. But they still matter – even in a situation that is calling for rapid decisions.
Economist: In favor of TARP / Douglas Elmendorf: Concerns about TARP.