Many Republicans who supported the Bush Administration’s Troubled Assets Recovery Program (TARP) are now encountering GOP primary problems. Some of these GOP voters are lumping TARP into the same category as the Obama stimulus (which was opposed by every Republican), the $3.6 trillion budget, the costs associated with health care reform and the use of Fannie Mae and Freddie Mac to subsidize irresponsible lending. Some of these voters do not realize that there was a major difference in how TARP was administered by the Bush and Obama administrations.
The voters have already inflicted punishment on TARP backers. Senator Kay Bailey Hutchison (R-TX) was called “Kay Bailout” by her primary opponent, and was defeated in her attempt to win the 2010 GOP gubernatorial nomination. TARP is also a major issue in the primary battles confronting Sen. John McCain (AZ) and Bob Bennett (UT).
Rep. Gresham Barrett (SC) is feeling the heat in his gubernatorial primary, and was booed of a stage because of his TARP support. Many Republicans supported TARP which was proposed by the Bush Administration. In 2008 it was endorsed by McCain and then Gov. Sarah Palin (R-AK). Former Gov. Mitt Romney (R-MA) said supporting TARP was difficult for any Republican but it was the “correct and courageous” thing to do. Romney went on to say:
I hate the way TARP was administered, but I can tell you that we were on a precipice unlike anything we have known before in modern history with the potential of a complete collapse of our currency system and our financial system. Had we not taken action, you could have seen a real devastation. . . TARP prevented a systemic collapse of the national financial system. . . It was intended to prevent a run on virtually every bank and financial institution in the country.
Nicole Gelinas of the free-market Manhattan Institute noted: “We were never going to escape this debacle without pumping massive amounts of taxpayer money into the financial system.”
The first $350 billion TARP installment was spent by Bush and the second $350 billion installment went to the Obama Administration. TARP passed the Senate on October 1, 2008 on a 74 to 25 vote, and the House approved it on October 3 by a 263 to 171 vote.
TARP was supported by 34 Senate and 91 House Republicans, but public opinion was always strongly against TARP. TARP was designed to address the subprime mortgage crisis, and it was enacted during a year of tremendous upheaval on Wall Street.
This difficult year included the sale of investment banks Bear Stearns and Merrill Lynch, the failure of Lehman Brothers and the government rescue of the American International Group, Fannie Mae and Freddie Mac. None of this halted the panic on Wall Street.
TARP was a capital investment in the financial system to prevent a huge collapse. It was essential to save the financial markets because they have an enormous impact on pensions, savings, investments and mortgages. In the fall of 2008 many experts said the worldwide banking system would collapse within days without TARP.
After Lehman Brothers failed in mid-September of 2008, all commercial credit in the United States came to a halt. With the credit markets frozen there was tremendous volatility in the stock market. Bush was told by Treasury Secretary Henry Paulson and Ben Bernanke, the Chairman of the Federal Reserve Board, that a failure to act decisively could plunge our nation into another Great Depression.
They said without a massive government intervention, America faced a total financial collapse because of lost confidence in the banking system. Bush said, “I readily concede I chucked aside some of my free-market principles when I was told by my chief economic advisers that the situation we were facing could be worse than the Great Depression.”
Rep. Sue Myrick (R-NC) spoke for many of the GOP TARP supporters in September of 2008 by saying “We’re on the cusp of a complete catastrophic credit meltdown. There is no liquidity in the market. We are out of time. Either you believe that fact, or you don’t. I do.”
Former Sen. John Sununu (NH) is one of the two Republican members of the TARP oversight panel. He says the program “did help to stabilize financial markets during the critical period of November and December in 2008.”
Republican primary voters are now attacking lawmakers in their own party for supporting a program that A) was created at the behest of a Republican President and B) was central to saving America from a serious depression. The infusion of $350 billion by the Bush Administration was the best way to slow the nation’s slide to the financial edge. The program worked and the Republicans should be glad it did.
UPDATE – TARP Ends, October 4, 2010
As of October of 2010, $67 billion remains outstanding of the TARP funds which went to the auto industry. GM is planning to raise funds through an IPO, an Initial Public Offering. The government is ultimately expecting to lose $17 billion on the auto loans, but at the same time they are making a $9 billion profit just from the money that was lent to Citibank. Treasury Secretary Geithner said:
The returns we’ll get from our investments in banks and AIG will be more than enough to cover the money we’ll lose in autos. The net costs of TARP will be a fraction of their original advertised cost, but profits aren’t the proper measure to use when evaluating TARP. I don’t like to focus too much on just the accounting cost. We weren’t in the business to make money. Even if they had lost much money, that would have been the right thing to do. I think it’s an excellent record for careful financial stewardship.
Geithner pointed to metrics such as the speed at which the price of borrowing came down in 2009, the resumption of economic growth in the second half of 2009, and the speed with which banks raised private capital to replace public funds. As Daniel Gross of Yahoo Finance has written: “TARP has been an enormous success from a policy perspective — it saved the financial system and averted a second Great Depression at a very low price to taxpayers. But politically, like the assets it was designed to remove from banks, it remains toxic.”
It should also be noted that TARP was not the only effort to unfreeze the credit markets. In the words of Robert Samuelson, the Federal Reserve also “devised ingenious ways to provide credit to parts of the financial markets (commercial paper, money market funds) that were being abandoned by private lenders. For almost two years, it held its short-term interest rate near zero. All this arguably averted a second Great Depression but obviously did not trigger a vigorous economic recovery.” In late 2008 the Fed authorized a $1.725 trillion purchase of Treasury bonds, mortgage backed securities and Fannie Mae and Freddie Mac bonds.
“The Tale of TARP”, Washington Post