I had the rather traumatizing experience of running into a professor this weekend. A man whose early work was brilliant, but who did not pursue it and ended up devoting his life to justifying why economic theory does not need to change. Basically, someone who inhabits an alternate reality constructed to protect his self-image. True to form, he is still justifying the failure to act by viewing the world as just fine as it is: he genuinely believes that the financial system has been saved. I challenged this view and pointed out that only a complete failure of analysis could lead one to conclude that the financial system was sound, but I didn’t really expect him to process what I had to say. With some people communication is simply impossible.
The world we live in is one where a lot of people desperately want to believe that everything is okay. Facing the possibility that the foundations of our economy are deeply unstable, that the authorities have a mammoth task before them and that it is possible that our political system does not have the strength to pass the necessary legislation is frightening.
People want to believe that the disaster that was the TARP program did good things for the economy. For this reason, voices like Steve Waldman’s and Haldane and Alessandri‘s are extremely important. Steve Waldman makes the key point about TARP: Everybody knew after the Bear Stearns debacle that a resolution authority was necessary — and Treasury chose instead to write up a bill that was designed to give taxpayer money away to the banks. Given that after the Bear Stearns collapse it was clear that none of the investment banks had a viable business plan in a crisis (unless you consider running to the Federal Reserve for a handout a plan) and thus that the whole industry was on the short-list for resolution, Henry Paulson’s close ties to Goldman Sachs almost certainly affected his judgment on this matter. (Remember that, if resolution was an option in September 2008 the Fed might not have extended additional support to the investment banks via the repo market and the conversion to bank holding companies. These actions were taken because there were no alternatives.)
Now, we all need to admit that Paulson’s failure was an extremely human failure — that none of us can actually know whether we, having spent the whole of our working lives at a firm and then finding ourselves handed the job of drafting the law that would in all probability dissolve that firm, would not also have balked at the task and failed. But the fact that a playwright could turn Henry Paulson’s career into a classical tragedy, doesn’t change the fact that TARP was a failure.
As Waldman observes, it is important to state clearly that the policy decisions taken in 2008 were a failure, and that they were a failure because they were shaped by people with close ties to the financial industry. The old saw is still true: “The first step in recovery is admitting you have a problem.”