Reasons to Reject Praise for TARP

Published May 23, 2011

Heartland Institute Fellow Ross G. Kaminsky responds to fellow columnist Ben Stein regarding the Troubled Asset Relief Program. Reprinted with permission from The American Spectator.

Dear Mr. Stein,

Not least due to being a frequent American Spectator (Web site) contributor myself, I enjoy reading your writing (and I’m glad you think better while doing so.)

I respectfully disagree with your glowing review of TARP [the Troubled Asset Relief Program]. If I may respond to your article’s French with some French of my own, your analysis falls into the trap that Bastiat described with “Ce qu’on voit et ce qu’on ne voit pas,” namely that which is seen and that which is not seen. (I’m sure I don’t need to tell you that’s the essay which contains the famous parable/fallacy of the Broken Window.)

What was seen with TARP is that it stabilized the banking system and that the Congressional Budget Office now suggests the cost to the taxpayers may only be $25 billion. What is unseen, however, are a few important things:

1. The banking system may not have performed as badly as the politicians’ sky-is-falling predictions. (The crying “wolf” continues today with the debt ceiling debate.)

2. The instability might have been a lot less if “they” had not shown policy schizophrenia by arranging a government-backed takeover of Bear, Stearns while allowing Leman to fail.

3. Perhaps most importantly is the substantial risk of moral hazard, of cementing into our banking system the idea of “too big to fail” despite rhetoric to the contrary. Perhaps TARP directly cost taxpayers less this time than some thought it might, but it could end up costing us much more later.

4. On a related note, I don’t like the broader message that it’s OK for the federal government to interfere in the private economy because it claims a situation is critical or because its motives are at least superficially noble. If TARP is OK, then why shouldn’t mortgage modification or cash-for-clunkers or picking favorites within industries be OK?

Don’t forget, the government forced quite a few institutions to take money they neither wanted nor needed. And once you have their money, you’re under their thumb. This is the same government that trampled decades or centuries of bankruptcy law by giving the property of Chrysler and GM bondholders to their union buddies. (Your grudging support for the auto bailout is not just wrong-headed; it’s intentionally introducing a cancer into the body of economic liberty.) It’s all fodder from the same toxic mill that gave us TARP, and taking the first bite, even if you’re hungry and it seems harmless and tasty, is a bad idea.

By the way, regarding supply-side economics, it’s been a long time since its proponents claimed that most or all tax rate cuts would “pay for themselves.” It’s unfair of you to characterize that as being the central tenet of supply-side. (That said, the Bush tax cuts probably did increase government revenue above what it otherwise would have been, and the Clinton capital gains tax cuts certainly did.) In any case, the real point is that tax cuts reduce revenue by less than static modeling supposes for reasons that I don’t need to explain to you.

I note that you next wrote about alcoholics and then went to sleep, so maybe I should ascribe these few paragraphs of yours to imbibing a fine wine at Del Frisco after a tiring afternoon or travel. I hope so, because I don’t like seeing someone who is widely viewed as an intelligent spokesman for conservatism, especially regarding economics, giving such aid and comfort to the enemy.

Most sincerely,

Ross G. Kaminsky