04.04.2011 0

Would we be better off today without TARP?

By Adam Bitely – In Robert Samuelson’s recent op-ed praising TARP as a success of government intervention that stabilized the financial market, he stated, “Without TARP, we’d be worse off today. No one can say whether unemployment would be 11 percent or 14 percent; it certainly wouldn’t be 8.9 percent.”

Samuelsson must have access to information that the rest of us have been denied.

First, Samuelson bases such predictions on false alternatives. One of those alternatives is that the banking system would have been nationalized. The other alternative? No government intervention at all — which has never been a way that government responds to crisis.

To assume that the alternatives would have delivered no such success as he claimed TARP did implies that he has access to some level of knowledge (probably in the form of a crystal ball) that indicated that only TARP would have caused unemployment to be less than what it could have been.

The fact is, no one knows what the financial market would look like today without TARP. With free market solutions never even considered in 2008, the only outcomes that were ever projected were those that showed market stabilization only if government had its way.

But the question remains, would we be better off today without TARP?

There is no doubt that we would all be better off, no matter the circumstances, had the government not unwillingly directed our money into failing institutions. By diverting resources to bail out mismanaged banks, capital was prevented from flowing in other more desirable directions.

Even more suspicious was the matter in which the bailouts were implemented. Instead of the government immediately disclosing the amounts of money they had loaned to banks, they kept a tight seal on such information in an effort to keep confidence in those banks afloat. The result of such secrecy was a lack of accurate information in the marketplace about which institutions had mismanaged their customers’ money. Bad actors were allowed to keep on going along without market forces intervening.

And a real hole in Samuelson’s praise for TARP lies in the fact that unemployment continued to increase well after TARP was implemented. When it was passed, unemployment was just 6.6 percent, but a year later it topped 10 percent. Today’s 8.8 percnet unemployment is not a result of a successful TARP program, but rather, a sign that the economy is beginning to finally stabilize — and that stability is still in question.

TARP advocates believe that banking failures would have been the most undesirable outcome of a non-TARP or a non-intervention scenario. But it is through the failure of mismanaged firms that markets correct themselves.

Creative destruction — meaning the reallocation of resources from failed firms to more efficient uses—is the free market way of correcting the market place. Barring creative destruction through government cash infusions results in clouding the marketplace by preventing people from the necessary information of which firms are correctly or incorrectly managed.

One thing is for sure, Americans would have benefited much more had the government sat back and allowed the financial marketplace to go in the direction that the invisible hand led it. But because such elementary economic principles were ignored, the economy continues to lag. And that lag is the legacy of TARP.

Adam Bitely is the Editor-in-Chief of NetRightDaily.com. You can follow Adam on Twitter at @AdamBitely.

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