Ross:

TARP may have saved the United States from 15 percent unemployment, but it also implicated our government in the kind of crony capitalism you’d expect from a banana republic. If it was necessary, it was also un-American. If it worked, it did so while doing grievous damage to the credibility of Wall Street and Washington alike.

This is a fair description of a main reason why so many people were and still are profoundly hostile to the TARP. At the heart of hostility to the TARP is the conviction that there was something inherently dangerous and outrageous in handing over money and ceding unaccountable power to part of the executive branch. It seemed even more dangerous and outrageous at the time, since the administration being entrusted with this power had already shown on many occasions how it would abuse vaguely-defined powers in the absence of strict oversight. There was also a visceral reaction against rewarding failure and directing taxpayer money to financial institutions that did not deserve public assistance.

What Ross’ column does not do is carefully analyze the claim that the TARP “worked.” I understand this is partly for reasons of limited space and partly because of the structure of his argument (i.e., “it worked, but at great cost”), but it really is vital to the debate. It’s one thing to say that opponents of TARP showed a healthy distrust of the outrageous way in which the program was forced down the public’s throat, and it’s quite another to say that their opposition to the program was sound on the merits. If TARP supporters can console themselves with the pleasant fiction that the program was vitally important and successful, they can dismiss the backlash to it as ignorant yahooism (as they have been doing for years) and congratulate themselves on their wise, statesmanlike ability to do what is necessary despite popular resistance. More to the point, in future moments of panic they will be certain to charge ahead with similar outrages in the confidence that they were right to insist on the TARP in late 2008. If we assume instead that a lot of this is self-serving twaddle, we will be a lot closer to the truth than the claims that the TARP “worked.”

People credit the TARP for having “worked” because they conclude that it had a lot to do with the stabilization of the financial sector. If the financial sector seems stable and most of the TARP money has been repaid*, they reason that the TARP must have worked. Never mind that financial institutions were being stabilized in other ways, and the accounting rule that had saddled them with enormous liabilities had been changed. In the meantime, TARP funds were being doled out to Detroit and were specifically not being used for their intended purpose of purchasing “toxic assets.” Yet somehow, magically, the TARP “worked.” Most of the banks that were forced to take TARP money didn’t need it, didn’t want it, and could fairly easily pay it back. It is small comfort that the TARP didn’t end up costing the public anything when the money wasn’t really needed in the first place. The major financial institutions were forced to take the money as a group because Paulson didn’t want to reveal the very shaky positions of a few major banks.

Whenever I read that the TARP “worked,” I am reminded of the many claims that the “surge” worked. What this means is that there was a dangerous, unstable situation in Iraq that later became more stable almost entirely for other reasons, and Washington claimed that it was the particular intervention of sending a few additional brigades on a temporary basis that was decisive in bringing about that stability. Nowadays it is common for more people to be skeptical of the claim that the “surge” worked, because more critics have been judging the “surge” by the standard set by the Bush administration that ordered it. If more people would judge the TARP by the standard of why it was supposedly necessary and what it was supposed to do, everyone would be able to agree that the TARP didn’t work at all. Indeed, as critics of the program said at the beginning, no one had any idea how to make it “work,” which is why the Treasury early in the Obama administration simply gave up on trying to make it work.

* The banks’ repayment isn’t as straightforward as it might seem. As this contribution at Naked Capitalism explains:

And how did the banks pay back TARP? First, we got rid of mark-to-market accounting, changing their balance sheets overnight, and then the banks have been borrowing from the Fed at ZERO and earning the spread on Treasuries or anything else they wanted to put the money in. The effect of this process is a transfer of wealth from savers (who depend on bank CD’s) and pension funds (who are often required to invest in goverment bonds) to the same banks that took money through TARP. This cost amounts to hundreds of billions of dollars each of the last two years. And TARP had negligible costs?