JONATHAN CHAIT OCTOBER 4, 2010
[Guest post by Noam Scheiber:]
Sunday was the second anniversary of TARP, the just-phased-out government response to the financial crisis of 2008. Or, as the Republicans who voted for the program like to call it, the “$700 billion Wall Street bailout.” Suffice it to say, TARP is one of the least popular federal policies of its generation—right up there with the great Medicare surtax of 1989—and possibly several generations. That’s true even though it clearly succeeded in its short-term goal of stopping the post-Lehman panic, and at a fraction of the cost anyone imagined. (Treasury’s latest estimate is that it will set taxpayers back a mere $50 billion, and it could actually make money depending on how the IPO of GM goes, and on the just announced restructuring of AIG’s bailout.)
Of course, no one can say yet whether TARP repaired the financial system in a way that helped put the economy back on track for steady, long-term growth. In the meantime, it’s worth asking a crasser question: Was it possible to achieve the same short-term results at lower political cost? In his recent piece on the subject, my colleague John Judis argues that it was. John suggests Obama could have kept intact the same basic approach to the financial rescue—that is, the same basic strategy for deploying TARP funds—but eluded a massive populist backlash by being tougher on Wall Street rhetorically. He also thinks some symbolic policy changes would have helped (like reneging on the $165 million in performance bonuses for AIG executives that came to light in March 2009).
For what it’s worth, I’ve always been less optimistic that there was an alternative political path available to Obama given the same set of substantive choices. My own view is that the basic chronology of events--first the administration responded to the crisis, then unemployment hit a 26-year-high--was always going to deal a body blow to the administration’s approval rating, regardless of what followed symbolically and rhetorically. But even I’ve suggested that, say, handling the AIG bonus situation differently might have helped insulate the administration from voters’ populist spleen.
There's a problem with such logic, though, which is that it's not so easy to separate the broad sweep of policy from the rhetoric and symbolism. In this case, it strikes me as pretty close to impossible.
A little history is in order to get at this point. During the presidential transition, one of the White House’s top priorities was persuading Congress to allocate the second $350 billion tranche of TARP money. (When Congress approved the program in October 2008, it only authorized half the money so as to maintain some leverage.) Chief of staff designate Rahm Emanuel rode the incoming economic team almost continuously about its progress on securing the funds, until the authorization finally came. The White House justifiably feared that the financial system might relapse (it was hardly healthy at the time) and that, without the money in hand, it would be powerless to respond.
The catch was that, by doing this, Obama basically took full political ownership of the bailouts from day one. (Actually, even before day one--the Senate released the money in response to Obama’s request the week before the inauguration.) That meant anything unsavory or inconvenient that later dogged recipients of bailout money—not just AIG, Citigroup, and Bank of America, but hundreds of smaller financial institutions across the country—was his to answer for.
Alas, beyond a certain point, it simply wouldn’t have been possible to deflect such developments with populist symbolism. To take the most obvious example, having invested a lot of money in the likes of Citigroup and Bank of America, the government was clearly eager to see their stock price and earnings recover throughout 2009. But, of course, promoting a swift recovery at these companies wasn’t exactly a recipe for building political goodwill at a time of skyrocketing unemployment.
So, yes, reneging on the AIG bonuses would have helped at the margins. But the real choice wasn’t between Obama’s actual approach, on the one hand, and pursuing the same broad policies while getting tougher with the banks politically. The real choice was whether or not to pursue the policies themselves*--that is, whether or not to embrace TARP. Had Obama not petitioned for that second tranche of money, he could have positioned himself as an enemy of the bailouts (substantively and politically) and begun bashing them as a deeply misguided legacy of his predecessor. (Yes, he would have had to explain away his own vote for the program as a senator. But, given the way its erstwhile Republican supporters repositioned themselves, this hardly seems like a major hitch.) In this way, he would have benefited from the ensuing gusher of populist bile, rather than watch it eat away at his presidency.
I don’t write this facetiously—it was a real choice. After all, Franklin Roosevelt made a similar calculation during his transition, mostly refusing to collaborate with his predecessor so as to leave few doubts about who to blame for the terrifying economic situation. In fact, I think you can make a principled case that Obama should have done the same thing, though you’d also have to grapple with the economic fallout. (Which is why I think it’s a pretty tough decision to defend. I’m generally skeptical of arguments that lean too much on market confidence, but I think going the populist route in early 2009 would have incited real panic, to devastating effect.)
The point is just that we should be clear about the options actually available to Obama for creating meaningfully distinct political outcomes: the one he chose versus one that was radically different (i.e., repudiating TARP). Anything in between strikes me as pretty unlikely to have changed the underlying political dynamic. Believing the contrary—something I’ve certainly done from time to time—amounts to conjuring up a counterfactual that probably never had a chance of existing.
*A third alternative would have been to embrace TARP but go much further—toward something like nationalization of several large institutions. This might have worked both substantively and politically. But, then again, it might not have worked on either count. At the very least, the variance in outcomes seems likely to have been higher. (I'm going to try to flesh this idea out down the road.) In any case, many administration critics, like John, don’t think large-scale nationalization was a desirable response.
Senior editor Noam Scheiber is a Schwartz Fellow at the New America Foundation.
Update: A number of commenters have complained that Obama had other choices available within the basic TARP rubric--he could have demanded tougher terms for government capital, insisted on haircuts for bondholders, etc. I'm not disagreeing--in fact, I wouldn't have minded seeing the terms get a bit tougher. But keep in mind a few things:
First, most of the capital that went to banks was already out the door by the time Obama was sworn in. Granted, some of that happened at a point in the transition when Obama was effectively in charge. (Like the $20 billion that went to Bank of America on January 16, 2009.) Nonetheless, the Bush administration arranged the biggest chunk. For all the (justified) hand-wringing within the Obama economic team, there just wasn't much new capital injected on their watch. And renegotiating terms with recipients ex post would likely have been a huge, messy diversion from the task at hand.
Second, don't confuse politics with policy. Even if the terms had been tougher at the margins--which is what we're talking about, and which, again, might have been desirable--I don't see how it would have changed the game politically. Some commenters cite GM, whose CEO was fired and whose bondholders took a hit. Even so, the GM bailout was enormously unpopular. And GM is a car company, where a lot of ordinary, blue-collar Americans work, and whose products ordinary Americans buy. If any bailout is going to be popular, it should be GM's. The fact that even that bailout was unpopular suggests the bank bailouts never had a chance, however they were structured.
Third, don't forget that GM was nationalized. As I said in the original piece, bank nationalization might have produced a different political outcome (though, again, it didn't help much with GM). But that was a fundamentally different direction. The premise I was rebutting here was that Obama could have followed the same basic substantive path he pursued on the bank bailouts, but at significantly lower political cost.