"Where the Bailout Went Wrong"

The special inspector general for the Troubled Asset Relief Program delivers his verdict:

Where the Bailout Went Wrong, by Neil Barofsky, Commentary, NY Times: ... Though there is no question that the country benefited by avoiding a meltdown of the financial system, this cannot be the only yardstick by which TARP’s legacy is measured. The legislation that created TARP, the Emergency Economic Stabilization Act, had far broader goals... These Main Street-oriented goals were ... a central part of the compromise with reluctant members of Congress to cast a vote that in many cases proved to be political suicide. ...

But it has done little to abide by this legislative bargain. Almost immediately,... Treasury’s plan for TARP shifted from the purchase of mortgages to the infusion of hundreds of billions of dollars into the nation’s largest financial institutions...

In the final analysis,... Treasury’s broken promises ... have turned TARP — which was instrumental in saving the financial system at a relatively modest cost to taxpayers — into a program commonly viewed as little more than a giveaway to Wall Street executives. ...

Treasury’s mismanagement of TARP and its disregard for TARP’s Main Street goals ... may have so damaged the credibility of the government as a whole that future policy makers may be politically unable to take the necessary steps to save the system the next time a crisis arises. This avoidable political reality might just be TARP’s most lasting, and unfortunate, legacy.

This is from back in October:

The false belief that free markets will always magically transform into ideal competitive markets was one of the problems that led to the financial crisis. Markets that should have been regulated due to the presence of asymmetric information, monopoly power, moral hazard, fraud, political influence, and other problems were left to regulate themselves with disastrous consequences. ...

With a financial system teetering on the edge of collapse, there was no choice but to bailout systemically important banks that were in trouble. However, the manner in which the bailout was executed has caused a public backlash. The problem is that the people who had a hand in creating the crisis, and profited so much as the housing bubble inflated, were rewarded handsomely when too-big-to-fail financial firms were bailed out. ... The understandable lack of public support for such policies will make it very difficult for Congress to act ... the next time it’s needed, and it very well could, the result could be disastrous

The crisis should have taught us that government has an essential role to play in preventing problems from occurring in the economy, and in correcting problems when they occur despite our attempts to prevent them. But, unfortunately, due to poorly executed policy, political posturing, obstructionism in Congress, and ineffective rebuttal from the administration, that’s not the lesson that has been learned.

And, back in the present, Yves Smith is incredulous about a voice from the past, Alan Greenspan, who has an op-ed warning about the dangers or financial regulation.