Sophisticated people have a hard time understanding popular outrage about the banking bailout. Indeed, the TARP watchdog Neil Barofsky’s complaints that most TARP dollars were used to increase capital cushions and pay bonuses rather than increase lending strikes many as a silly complaint. Of course banks needed to recapitalize themselves before they could start lending, the sophisticates say.
In fact, some people insist on claiming that the purpose was always a recapitalization of the banks.
That might be true. But it certainly was not what the American people were told over and over again. They were told, unequivocally, that the bailout would increase lending.
- When he first explained that the TARP would be used for capital injections, then Treasury Secretary Hank Paulson said the purpose of the program was to get banks to “deploy, not hoard, their capital.”
- When Tim Geithner went before the Senate for his confirmation hearings, he said: “If confirmed, I will carry out the reforms that President Obama and I believe are needed in this program. This program must promote the stability of the financial system and increase lending.”
In response to this the defenders of the bailout tend to make a few very slippery replies. The first response is often to claim that the bailout has increased lending above what it would have been without the bailout. This is a surprising counter-factual and question begging argument for which there is no evidence. The only real reply is: oh yeah, buddy? How do you know what lending levels would have been without the bailout? You cannot simply assume that lending has increased in order to prove that the bailout increased lending.
The second response, recently raised by Derek Thompson at the Atlantic, is that banks would be lending more but the economy isn’t really demanding more lending because we’re in a recession. This has the ring of truth, but it’s only the ring of a half truth. If we didn’t need more bank lending, then why did we bail out the banks for the purpose of increasing bank lending? This response actually undermines the entire public rationale for the bailout.
The reason the public rationale focused on lending was that the policy makers wanted to be able to claims they were attemtping to the economy rather saving banks. That is, they wanted to pretend they were not simply recapitalizing firms that should have been shut down.
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