An Associated Press article purporting to correct the errors of the candidates in last weekend’s GOP presidential debate includes the following passage:
RON PAUL: “We have dumped the debt on the American people through TARP funding as well as the Federal Reserve. So the debt is dumped onto people. And what did we do? We bailed out the people that were benefiting during the formation of the bubble. So as long as we do that, we’re not going to have economic growth.”
THE FACTS: The $700 billion Troubled Asset Relief Program was proposed by President George W. Bush and passed by Congress in 2008 to help rescue banks and other imperiled financial institutions. Nearly all of the money has been paid back, with interest.
Most economists credit the program with keeping the financial system from freezing up and helping to prevent the worst recession in 30 years from becoming another Great Depression. The Federal Reserve does not operate on taxpayer money and does not receive any operating funds from the Treasury. In fact, it makes money every year from its banking operations, and turns over profits to the Treasury.
A necessarily speculative counterfactual claim made by some economists is scarcely a “fact,” and we might wonder about the value of a consensus among economists in the first place in light of their rather unimpressive performance in understanding the economy over the past ten years. David Stockman, on the other hand, notes that “30 months after the fact, evidence that the American economy had been on the edge of a nuclear-style meltdown [at the time TARP was passed] is nowhere to be found.”
On the “TARP money was repaid” front, I note the comments of Dean Baker:
We are also supposed to feel good that the vast majority of the TARP money was repaid. This is another effort to prey on the public’s ignorance. Had it not been for the bailout, most of the major center banks would have been wiped out. This would have destroyed the fortunes of their shareholders, many of their creditors, and their top executives. This would have been a massive redistribution to the rest of society — their loss is our gain.
It is important to remember that the economy would be no less productive following the demise of these Wall Street giants. The only economic fact that would have been different is that the Wall Street crew would have lost claims to hundreds of billions of dollars of the economy’s output each year and trillions of dollars of wealth. That money would instead be available for the rest of society. The fact that they have lost the claim to wealth from their stock and bond holdings makes all the rest of us richer once the economy is again operating near normal levels of output.
Instead, we have the same Wall Street crew calling the shots, doing business pretty much as they always did. The rest of us are sitting here dealing with wreckage of their recklessness: 9.6 percent unemployment and the loss of much of the middle class’s savings in their homes and their retirement accounts. And the lackeys of the Wall Street crew are telling us that we should be thankful that we didn’t have a second Great Depression. Maybe we don’t have the power to keep the bankers from picking our pockets, but we don’t have to believe their lies.
And finally, Ron Paul never said the Fed got money from the Treasury; presumably we can trust that a guy who’s written as much as Ron Paul has on the Fed knows something as elementary as this. The point, rather, is that when the Fed qualitatively degrades its balance sheet, as when it swaps decent assets for lousy ones, it harms holders of dollars. The mechanism works like this: When the Fed wants to withdraw money from the economy it sells assets — but if its assets are lousy and won’t fetch many dollars, it has a more difficult time reversing its earlier expansionist monetary policy, and the likelihood of price inflation is now all the greater.
2:21 am on December 12, 2011
