2) The wrong message
By preventing large institutions like Bank of America and Citigroup from failing, the government risked creating a problem of moral hazard--that is, of promoting irresponsible bank behavior that might not occur without the prospect of future bailouts. Earlier this year, then the special inspector general for TARP, told a congressional committee that the bailout of large financial institutions promoted a "'heads I win, tails the government bails me out' mentality." Harvard University economics Professor Ken Rogoff agrees: "[The financial sector] certainly had a stressful period, but they came out of it with huge profits and huge gains," he says. Baker says that this has repercussions for the entire banking sector. "Lenders expect government to back them up; they're more comfortable lending to Citi or Goldman [Sachs] than to smaller banks or another borrower," he says.
3) The Fed did the heavy lifting
Baker says that Federal Reserve programs, such as providing low-interest loans to financial institutions, played an indispensable part in promoting recovery to the financial sector. "We had TARP and on top of that, we had pretty much open access to the Fed through the discount window and the lending facilities. So you had some very, very serious support for the banks," he says. Rogoff goes so far as to call TARP "symbolic." "The real honest truth is a lot of what was done was done through the Federal Reserve and was really risking taxpayer money through the back door," he says. "TARP essentially put a seal of approval on the general approach of the government to try everything to prop up the financial sector."
4) Toxic politics
While TARP's effectiveness is arguable, it is indisputably an unpopular program with voters. Indeed, the public deeply dislikes the program, even as it fails to understand it. In April 2010, a Pew Research Center poll showed that only 42 percent of the public believed that TARP helped to prevent a more severe economic crisis. A July poll by Pew also showed, however, that only 34 percent of people knew that TARP was enacted under President Bush, not Obama. "No politician is going to call for a revival of TARP. It really has been reviled by the public," says Gattuso. Elliott agrees, calling TARP "the best large federal program ever to be despised by the public." He explains, "The public made up their mind early on. Most politicians won't even try to tackle [TARP]," for fear of being associated with a program the the public roundly rejects. GOP presidential hopeful Tim Pawlenty, for example, criticizes TARP on the campaign trail, while fellow hopeful Mitt Romney is qualifying his past TARP support.
5) What worked could have worked better
Rogoff believes that the government could have reaped far greater rewards from TARP by taking a tougher stance toward financial institutions. He calls the $21 billion that the government expects to recover from its bank programs "chump change, compared to what they might have gotten, had they insisted on an equity stake in the financial firms." This greater stake would have given the government far greater returns when companies like Bank of America and Citigroup recovered profits shortly after TARP's inception.