The Case for and Against TARP

Why the controversial program worked--and why it was a failure.


Chrysler has repaid much of its TARP money, GM is hiring again, and the financial sector is booming. Two and a half years after the Troubled Assets Relief Program was conceived, these are encouraging signs that the program my have helped avert disaster. However, despite the government's best efforts, the housing market remains anemic. Furthermore, many argue that the infusion of recovery funds further promotes bad behavior on the part of banks. So was TARP a win or a wash? Here are five arguments in the program's favor--and the top five against it.

[See a slide show of 5 reasons TARP succeeded and 5 reasons why it was a flop.]

1) Economic antifreeze

In propping up major financial institutions, TARP provided relief from the immediate problem of frozen credit markets, according to James Gattuso, a senior fellow in regulatory policy at the Heritage Foundation, a conservative think tank: "It served a critical function in terms of providing liquidity at a time that it was needed to counter a panic in financial markets," he says. Doug Elliott, a fellow at the liberal Brookings Institution, believes that without government support of financial institutions, the financial crisis would have taken on far greater proportions. "The recession we had would have been substantially worse; millions of people would have been out of work," he says.

2) A government program that costs less than advertised

When initially conceived, TARP was intended to purchase or insure $700 billion of mortgage-backed securities, and initial lifetime costs of the program were estimated to potentially reach $300 billion. The program's aims and costs have evolved drastically, and current numbers show its final costs to be far lower. The most recent numbers from the Treasury Department estimate $475 billion in total commitments, and estimate TARP's lifetime cost at $49 billion. [Read: Obama's secret weapon for 2012: the economy.]

3) Withdrawing money from the banks

The portion of the program specifically devoted to helping banks was particularly successful. The government invested $245 billion and has gotten $252 in repayments--a profit of $7 billion. According to Elliott, the major reason for this is that the financial industry has recovered so well from the state it was in when TARP was passed.

4) Revving up the auto industry

Auto companies bailed out by TARP funds have recently shown new signs of health. In 2010, GM saw its largest profits since 1999, and the company has also recently announced 4,000 new jobs. In addition, Chrysler has paid back more than $10.6 billion of its $12.5 billion in TARP loans, prompting Treasury Secretary Tim Geithner to pronounce government efforts toward the auto industry as successful: "Because President Obama made the tough decision to stand behind and restructure the auto industry, America's automakers are growing stronger, making new investments, and creating new jobs today throughout our nation's industrial heartland."

5) Jobs, jobs, jobs

The Treasury Department says that its recovery initiatives, including TARP, have saved 8.5 million American jobs. In a July 2010 paper, Princeton University Economics Professor Alan S. Blinder and Mark Zandi, chief economist at Moody's Analytics, furthermore estimated that with no government response to the meltdown, 2010 U.S. GDP would have been 11.5 percent lower. [Read: No reason to cheer drop in jobless claims.]

But the program is not without its critics. They point out that its housing initiatives have largely been ineffectual, and that it remains wildly unpopular with a public that resents bailing out institutions that nearly brought the U.S. economy to ruin. Here are five ways in which TARP has been a failure.

1) Little forestalling of foreclosures

The least successful area of TARP has been its housing initiatives. The Mortgage Loan Modification Plan, which sought to help homeowners stave off foreclosure, has barely made a dent--of the $30 billion the government intended to spend on the program, just over $1 billion has been disbursed. In a December 2010 report, the Congressional Oversight Panel for TARP estimated that the program would prevent only 700,000 to 800,000 foreclosures--a far cry from the three to four million that the program had originally hoped to avert. "The part of TARP that tried to help homeowners who were having trouble with their mortgages really never got off the ground in the way the administration wanted," says Elliott. Dean Baker, codirector of the progressive Center for Economic and Policy Research, also pronounces the program a disappointment. "There were a lot of promises made--that it was going to help keep homeowners in their homes, that we'd see all of these modifications. By that score, it certainly failed," he says. [Check out a roundup of political cartoons on the economy.]