The Troubled Asset Relief Program (TARP) implemented by former Treasury Secretary Henry Paulson was “the largest welfare program for corporations and their investors ever created in the history of humankind,” according to former U.S. Senator and current Chairman of the Congressional TARP oversight panel, Ted Kaufman.
At a hearing last Friday, Kaufman led a panel of economists and policymakers in a discussion of the impact of TARP on financial stability. Zero Hedge was kind enough to provide a transcript of the hearing, which “In typical Kaufman fashion, this no-nonsense hearing was one of the most informative and expository of all Wall Street evils to ever take place on the Hill. Which of course is why it received almost no coverage in the media.”
While Paulson and current Treasury Secretary Tim Geithner have touted the fact that TARP returned billions in profits, this does not come anywhere close to revealing the full impact of the taxpayer-funded bailout.
The fact that U.S. policymakers protected the shareholders and creditors of insolvent financial institutions using unprecedented sums of taxpayer money is reason enough for the program to be deemed a failure. If parties are prevented from suffering the consequences of their poor investment decisions, the free market cannot exist. Moreover, TARP set an extremely dangerous precedent of moral hazard, the effects of which will continue to play out in the years ahead.
In addition to the substantial moral hazard involved, it concentrated even more power in the largest and most reckless banks. By propping up too big to fail institutions, the risks of another financial crisis have increased significantly. Kansas City Fed President Thomas Hoenig even said so himself, and this view was echoed by several individuals at the hearing – including economists Joseph Stiglitz, Simon Johnson, and Allan Meltzer.
In summary, TARP did nothing to address the structural problems with the financial system; in fact, the program largely created more of what caused the problems in the first place.
In the transcript, Zero Hedge noted that that there are many very important lessons to be learned from the travesty known as TARP, which threaten the very democracy upon which the United States was founded. One example of this is:
“The failure to replace bank management, to do a rigorous evaluation of the state of bank assets and to restructure bank balance sheets accordingly has left the United States with weak major banks and a damaged sense of trust between the American public and our nation’s elected leaders.”