Column: Bailouts show good, bad government interference


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In late May, the Congressional Budget Office released its most recent assessment of the cost of the Troubled Asset Relief Program (TARP). This occasioned far less thoughtful discussion of the role of government than it should have, which is unfortunate because there are few better examples of good and bad government interference in markets than those the program embodied.

The original Troubled Asset Relief Program was signed into law three weeks after the September 2008 stock market meltdown and rolled a lot of financial activities into one piece of legislation. The law allowed the U.S. Treasury to buy some $700 billion of collateralized debt obligations (aka toxic assets). These assets were made up of billions of dollars of mortgages, which were, on average, remarkably safe. The problem with them was that it required months to determine the few that were not. As a consequence, they could not sell.

This meant the otherwise healthy banks that held them could not pay off depositors who wanted their money back. While most of these institutions were commercial or investment banks, a run on their assets would’ve likely sparked a general run on banks across the country. So, for all intents and purposes, the program allowed the U.S. Treasury to act a lot like George Bailey using his honeymoon money to quell a bank run. Just like George and Mary Bailey, the U.S. Treasury got all its money back from supporting liquidity in healthy banks.

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