The consequences of letting Lehman Brothers fail
Over at Powerline, they say that the “government’s $3 trillion and counting TARP program represents the greatest opportunity for sharp operators to profit at taxpayer expense in history.” Certainly the Inspector General’s report to Congress on TARP was not comforting. No doubt some people will get rich, or go to jail — or both — at the end of this sorry episode. However, the debacle that is TARP proceeds rather directly from the catastrophic decision to let Lehman Brothers fail in September.
Once the government let Lehman fail, which destroyed the entire worldwide banking system for a time, there were two choices: (a) a promiscuous use of government funds to unfreeze the system; or (b) another Great Depression — caused once again, as it was in 1930, by the failure of government to prevent a collapse of the banking system. TARP, or a better, simpler program to bolster bank capital, was necessary to prevent even greater calamity in the world economy. Some of our readers do not believe this, and we don’t know how to convince the skeptical — but we are virtually certain that this calamitous outcome would have eventuated because that is precisely what occasioned the last Great Depression. The situation in 2008 was in some ways even worse than that in 1930 because of the truly frightening levels of unregulated counterparty risk in CDS’s and other derivatives.
TARP is bad enough, but many of the TARP investments will be paid back or unwound at some time in the future. In a number of cases, the investments might be liquidated at a profit. So a good portion of TARP might turn out to be investment, not spending. That would be a good outcome. However, the huge numbers in TARP have possibly made it easier for the Obama administration to offer its grotesquely bloated budget with a straight face. Even taxing the rich at 100% cannot pay for the $4 trillion spending plan. We are of the opinion that the extravagant excesses of the Obama budget may have never happened without the sad precedent of TARP. For want of a nail….
April 28th, 2009 at 12:35 pm
‘We are of the opinion that the extravagant excesses of the Obama budget may never have happened without the sad precedent of TARP.’ Agree with that 100%, Dinocrat. I don’t think they would have had the temerity to spend even a small fraction of that amount had Bush not given them cover with the TARP program.
April 28th, 2009 at 8:50 pm
I’ve worked all my life. Never taken a dime, save when in the Army, and I did so little productive work, I felt overpaid at that. Now? I see local, state and federal government as an enemy of wealth and liberty.
I don’t even see them as my government. I see them as a plundering, lie manufacturing tribe.
You think everything will work out. I suppose Germans thought marching on Moscow would work out too. Except for that winter stuff and the Russians.
TARP will work. Except for the usual bungling, and thieving, and political influence, fraud waste and abuse. You and I know it will work because comrade, the government will tell us it worked out.
April 28th, 2009 at 10:49 pm
Tuesday links…
Another Big Rug: A floral carpet in Brussels. Thanks, reader.
Fisheries: "it is at least something that, after 25 years, the EU is recognising that one of its longest established policies has failed. It has yet to understand, however, t…
April 29th, 2009 at 7:03 am
“TARP is bad enough, but many of the TARP investments will be paid back or unwound at some time in the future. In a number of cases, the investments might be liquidated at a profit. So a good portion of TARP might turn out to be investment, not spending. That would be a good outcome.”
By definition, if the goal of TARP and its progeny is to recapitalize the banks, the government will have to overpay for the assets. Even if the goal is simply to remove the assets from the banks, there is no way the bureaucrats will be able to successfully negotiate against the banks, nor do they have the incentive to do the homework necessary to do this. There is no way at all in any scenario where TARP can be considered an “investment” or where there will be a “good outcome.” This is spending, plain and simple. There may be some incremental amounts realized due to appreciation or settlement which will cause the aggregate amount spent to be somewhat less than the numbers provided, but there is no way this can result in a positive “investment.”
April 29th, 2009 at 1:25 pm
…and who was Chairman of the New York Federal Reserve that made the decision
to allow Lehman to fail? Would it surprise you to know it was: Geitner
….and who was leading, for the first time in the polls for president the weekend
before Lehman was “allowed” to fail on that Sunday night? McCain
….and by Monday afternoon, who was ahead in the polls? Obama
(“we have have change now…)
….voila! Who is made Fed Chairman when Obama is elected? Geitner
…no…Lehman did not HAVE to fail….but….was it convienent? You decide.
…so, the true “consequences” are great indeed. Yes, they are.
April 29th, 2009 at 5:11 pm
Interesting observation, that the massiveness of TARP essentially desensitized us to heavy spending. I might have expected the opposite effect, that we’d be wary of a huge budget after spending so much already. But it does seem like you’re right. We got so used to seeing large numbers in the news, still more large numbers barely roused us. It’s kind of subtle, an example of “the power of small” applied to massive spending.