Dominating the Narrative
By Arnold Kling
Ygesias says, “I believe that absent the [TARP] bailout, we’d be looking at even higher unemployment today.”
I think this is a plausible claim. But I don’t know of a satisfactory way to evaluate it. It’s plausible because some plausible theories about the nature of the financial economy and its interaction with the real economy imply its truth. But other plausible theories do not. My problem is that I don’t know of a satisfactory way to evaluate these theories. I’m not saying that there is no way to evaluate them, only that I don’t know what it is. It would be nice to form a responsible opinion about this sort of thing. Can someone please help?
One of my strongest beliefs about the financial crisis is that the narrative that we come to accept about it will matter much more than the crisis itself. I see a strong parallel between the narrative “TARP prevented a Great Depression” with the narrative “The New Deal ended the Great Depression.” The latter narrative has very little economic support, even among economists who avidly support the New Deal. However, it is the dominant narrative because it supports progressive ideology.
The claim that the economy would be much worse off now without TARP has been repeated so many times that I must infer that it has as much ideological significance as the claim that the New Deal ended the Great Depression. And yet, the claim is rarely backed by evidence.
Some further comments.
1. I will certainly respect you in the morning if you say that we cannot possibly know what would have happened without TARP, because history does not provide us the opportunity to run controlled experiments. But I think that one must try to make intelligent guesses, even though we can not know with high confidence.
2. Textbook macroeconomics would tell you that we did not need TARP. Textbook macroeconomics says that fiscal and monetary policy can deal with a recession. If jobs programs are a third-best policy for dealing with unemployment, then bank bailouts are no more than a fourth-best policy.
3. Ben Bernanke studied the Great Depression, and he found that the loss of banking institutions mattered, because borrower-lender relationship capital was destroyed. But even if we stipulate that his view was correct for the 1930’s, it was not necessarily correct for today’s economy. What we had last year was not a crisis in ordinary banking, but a crisis in securitization. In my opinion, we can do without securitization. Instead, in my view we can, and probably should, return to ordinary banking.
4. WIthout TARP, policymakers could have focused on the parts of finance that do not relate to securitization. Providing a temporary guarantee for money market fund deposits was probably a good idea. It was probably a good idea to make sure that the commercial paper market kept functioning for ordinary businesses–but not for funding structured investment vehicles filled with mortgage securities.
My view of history is that what TARP accomplished is that it saved the firms that were involved in securitization. If you think that the institutional capital embedded in that industry is really, really valuable, then TARP had benefits that might offset its costs. My own view, having seen first hand how securitization worked when I was at Freddie Mac, is that it relies too much on government guarantees, and old-fashioned banking is a viable alternative. So I would not have been willing to put much effort into saving securitization.
Furthermore, I think that saving securitization produced no short-term benefits for dealing with the recession. If anything, it diverted tax resources from other uses that could have done more to maintain full employment.