In 2008, there was only a month between the passage of the TARP legislation and Election Day. Unless they were accustomed to following the financial markets, most voters were still trying to figure out what the financial crisis was all about and why Congress appropriated $700B to “fix” the problem. Two years later, with unemployment hovering around 10%, the national debt out of control and the Wall St. bonus train back in high gear, voters are rightly ticked off. And incumbents who panicked and voted for the bank bailout are about to pay the price.
One of those incumbents is Joe Donnelly (D) of Indiana’s 2nd district. Like most of those in Congress who voted for the bailout, he remains adamant that TARP helped prevent an “economic depression,” and that by standing up to his own constituents and voting against their wishes, he did the right thing.
Donnelly says that Jackie Walorski (R), his Tea Party-backed oppenent:
- “obviously does not understand that, without these steps [i.e. TARP], credit would have completely frozen up, there would have been no loans available, there would have been bank collapses across the cocuntry and there would have been a global economic collapse.”
Readers of The Daily Bail know the deal, but just for kicks let’s unpack this statement of Donnelly’s. Some members of Congress probably voted for TARP for purely cynical reasons, but Donnelly could be the poster boy for dumb bailout votes – he’s clearly swallowed the Bernanke-Paulson story, hook, line and sinker. Let’s help him out a little, with some cold, hard bailout facts.
- First, interbank lending DID NOT “freeze,” nor did TARP prevent it from “freezing.” As researchers from FRBNY and MIT have shown, right through the entire crisis period, hundreds of billions of dollars were loaned in the interbank market – and paid back – EVERY SINGLE DAY. Both before and after Lehman, both before and after TARP.
- Second, there was never a choice between A) passing TARP and B) doing absolutely nothing while the world burned. Donnelly seems to actually believe that’s the choice he had. What a rube.
- Third, other means of stabilizing the financial system, besides TARP, could have been used. How do we know? Because they were being used AT THE VERY SAME TIME that TARP was being debated and then implimented. The Treasury, for example, stopped Paul Kanjorski’s fabled “electronic run” on the money market funds by issuing a blanket guarantee of all money market funds on September 19 – before TARP was even passed! The Fed intervened in the commercial paper market and nipped that problem in the bud lickety split – no need for TARP there. Though TARP raised the FDIC limit to $250K, new legislation wasn’t needed for the FDIC to guarantee all bank deposits under a systemic risk exception – which Bair, Paulson, et al. declared almost immediately after the bailout bill was passed. Further, the FDIC also initiated the TLGP to protect bank creditors, but it could have covered bank creditors in any case under the same systemic risk exception under which it protected depositors – and not in any way, shape or form did TARP have anything to do with it.
- Fourth, the TARP funds were originally intended for the purchase of “toxic assets” from the banks. That’s how the bill was sold, and that’s what Congress (including Joe Donnelly) voted for. But this plan could only “work” if taxpayers over-paid for the assets. If taxpayers paid less than they were worth, the banks would have had no reason to sell them. Even a panic-stricken Congressman should have known that TARP was a dumb idea just from a basic accounting perspective. But even if you agree with Paulson’s decision to take equity stakes in the banks instead, why take that step when regulatory forbearance or a change in FAS 157 would have had the same effect WITHOUT spending taxpayer dollars? Of course, FAS 157 was eventually changed, and with the help of Bernanke’s gift of zero interest rates, most banks paid back TARP. What a convoluted waste.
At this point, can someone please explain to me how “global economic collapse” comes into the picture? Everything that TARP is credited with having done, was actually achieved through actions requiring no legislation and had nothing to do with an arse-backwards capital purchase program. Anyone?
The funniest thing about Joe Donnelly’s bailout vote is that in the fall of 2008 he was telling everyone (all tough like) that “We’re going to get the Wall St. people who did this.” Oh yes, folks, heads were going to roll. People were going to pay the price. Joe Donnelly was going to… Joe Donnelly hopes you forget he said all that. Most of the TARP bank executives are still running the firms they nearly ran into the ground, picking up multi-billion-dollar bonuses last year with the help of taxpayer subsidies, while the rest (like Ken Lewis) left with their golden parachutes.
Further, Donnelly claimed that taxpayers would get every single penny of TARP money paid back, even from AIG. Really? Even Tim Geithner doesn’t make that claim, anymore. And what about the fact that much of the banks’ risk has the potential to be foisted right back onto the taxpayer by way of Fannie and Freddie – whose taxpayer credit card limit was upped to INFINITY on Christmas Eve last year? I suspect Donnelly doesn’t even know half of what’s gone on since he voted for a bailout bill he obviously didn’t understand. (Here he is simpering about naked credit default swaps in March of 2009, but talk is cheap — ask Obama.) Jackie Walorski, or any candidate who makes bank bailouts a campaign issue, should beat Donnelly handily. May he be the first of many!
Business Insider Emails & Alerts
Site highlights each day to your inbox.