Financial Regulation Questions
By Arnold Kling
Both from readers.
1. Is it more dangerous for TARP to succeed or to fail?
Interesting question. Think of four possibilities, based on perceptions and reality
1. TARP is perceived as a success, and it really was a success.
2. TARP is perceived as a success, and it really was a failure.
3. TARP is perceived as a failure, and it really was a success.
4. TARP is perceived as a failure, and it really was a failure.
For me, the worst case scenario is (2). I also think that (3) would be bad, on principle, because I don’t like living a lie. I could go back and forth on the others. The problem with (1) is that there would be an inclination to do it again, which in turn would mean that there would be an inclination to let too-big-to-fail banks grow out of control again. The problem with (4) is that failure is not good.
For what it’s worth, I believe that the success or failure of TARP will be difficult to determine. Is the economy doing better than it would be otherwise? Who knows? How can one tell?
If I were pressed, I would be inclined to judge TARP as a failure. The original proposal was to fix a temporary liquidity crisis, by buying toxic assets. The fact that this was not even tried raises doubts about the soundness of the original concept. And the fact that TARP money was used to bail out GM reinforces those doubts. The notion that the economy as a whole needs certain institutions to be maintained is really ripe for a failure to discern the seen and the unseen.
2. On my idea of passing a law that would send financial executives to prison if they fail to preserve the soundness of their institutions, a readers writes, “The symbiosis between regulators and executives is so complete that you’d never be able to punish one and not the other.”
I don’t agree with this. Once a bank fails, it would be up to prosecutors to determine if the law should be applied. They are not the same as regulators. Only if the regulators were willing–and able–to rise to the defense of mismanaged banks would the symbiosis be an issue.