By Marshall Auerback, a portfolio analyst, hedge fund manager, and Roosevelt Institute fellow
There’s a good reason why the Troubled Asset Relief Program (aka “TARP”) is “a success none dare mention”, to use the title of Ben Smith’s latest post at Politico. Put simply, it’s not a success. Calling the TARP a success is like claiming your wastrel son is getting his life together because he’s settled his gambling debts, while omitting that you are paying for his apartment, got him an overpaid job at your company, and are handing him $100 bills more than occasionally.
Indeed, the only way to call TARP a winner is by defining government sanctioned financial fraud as the main metric of results. The finance leaders who are guilty of wrecking much of the global economy remain in power – while growing extraordinarily wealthy in the process. They know that their primary means of destruction was accounting “control fraud”, a term coined by Professor Bill Black, who argued that “Control frauds occur when those that control a seemingly legitimate entity use it as a ‘weapon’ to defraud.” TARP did nothing to address this abuse; indeed, it perpetuates it. Are we now using lying and fraud as the measure of success for financial reform?
Virtually all of the goals of TARP could have been achieved via regulatory forbearance, rather than government bailouts. Money was “repaid”, not because the banks were accumulating massive profits as a consequence of their revival, but largely as an outgrowth of the accounting tricks sanctioned by Congress and the White House in the wake of the 2008 financial crisis. Why did the governments simply not temporarily suspend capital requirements? A government can always keep a bank in operation without bulldozing it. You can keep them functional via government control (i.e. the FDIC) and get rid of the corrupt management before you undertake anything else. There is no numerical limit to the amount of available bank capital. It’s about price, not quantity.
In any event, inadequate capital didn’t cause the financial crisis. Lying and corruption did.
Nothing in Basel III addresses the fundamental perverse incentives that cause recurrent, intensifying financial crises. The Enron era “control frauds” should have taught us that we can have financial crises without bank failures. We’ve kept all of the liars in power or paid them off with massive golden handshakes. At least with Enron, Jeffrey Skilling and Andy Fastow went to jail (although the way things are going, maybe Skilling will get released).
That aside, why doesn’t anybody mention the fact that the banks have basically been able to engage in perpetual backdoor bailouts via Fannie and Freddie? Because of the intense Congressional pushback on TARP, Geithner and Summers (who has a history of doing end-arounds Congress – see Mexico 1995), decided to continue the bailouts by using the GSEs as a dumping ground for the toxic junk.
There is a lot of anger directed at Fannie and Freddie in the wake of the meltdown, but the critics of the GSEs are never able to explain why defaults on home mortgages were so rare until the “free markets” took over the mortgage sector. As Randy Wray has pointed out,
Fannie and Freddie even survived the savings and loan fiasco of the 1980s, when thrifts were “freed” to pursue “free market” profit maximization that resulted in suicide for the whole industry. It was only after 2004 when Fannie and Freddie were directed to cater to control frauds like Countrywide that they got into trouble.
And Ben Smith seems to forget that Congress adopted unprincipled accounting principles that permit banks to lie about asset values in order to hide their massive losses on loans and investments, which allowed them to raise the capital. Well, I guess you can say that this is good, but it basically entrenches lying as a legitimate tool for economic policy. When we lie about accounting and leave zombie banks in the hands of those that looted them and caused trillions of dollars of losses we eviscerate our integrity and our efforts at economic recovery. And lying does not work very well – look at Japan. As Bill Black has argued, it prevents markets from clearing, it leaves failed banks under the control of failed bankers, and it leaves banks twisting slowly in the wind and unable and unwilling to fund the recovery.
The late Senator Daniel Patrick Moynihan coined the memorable phrase, “defining down deviancy”. Journalists who seek to justify TARP (and Smith is not the first), are symptomatic of the way we have come to define down financial deviancy, even since the days of Enron, in the manner in which they are willing to attempt to justify an abomination like TARP. Both the Bush and Obama administration followed a three-part strategy towards our zombie banks: (1) cover up the losses through (legalized) accounting fraud, (2) launch an “everything is great” propaganda campaign (the faux stress tests were key to this tactic and Ben Smith perpetuates this nonsense in his latest piece on TARP), and (3) provide a host of secret taxpayer subsidies to the systemically dangerous institutions (the so-called “too big to fail” banks). This strategy is the opposite of what the Swedes and Norwegians did during their banking crisis in the 1990s, which remains the template on a true financial success.
The problem is that the policy was not shaped by finance or sound economics, but by politics. Both administrations have sought to keep the American people from knowing about these cover-ups and secret subsidies because they know that we would not tolerate either policy. The cover-ups and secret subsidies are not simply awful financial policies; they are also a betrayal of democracy. And our press has gone from clulessly enabling this treachery to actively promoting it.