Opinion: Three Cheers for Government Bailouts

(Oct. 6) -- There is perhaps no word more likely to stoke the anger of ordinary Americans than "bailout." Whether it's the hundreds of billions spent to save the financial industry or the tens of billions allocated to rescue America's carmakers, Washington "bailouts" of private industry have come to symbolize all that is wrong with our supposedly omnipresent and overbearing federal government.

But there's one serious problem with all this anger -- it's utterly misplaced. Government bailouts have actually been a true success story that prevented a far worse economic calamity. Rather than a signal of out-of-control government, they are an excellent example of the critical role the federal government can play in stabilizing the U.S. economy.

Take for example the Troubled Asset Relief Program (TARP) program, which was enacted by the Bush administration and pumped billions of dollars into the crippled financial system. On Sunday TARP marked its two-year anniversary as perhaps the most despised federal program in American history. In Utah, Sen. Bob Bennett lost the GOP primary after opponents hung the epithet "Bailout Bob" around his neck. In Missouri, Democratic Senate candidate Robin Carnahan regularly attacks her Republican opponent Roy Blunt for rounding up votes in support of the measure. Nearly 60 percent of Americans consider it "an unneeded bailout."

Yet, as Alan Blinder, former Federal Reserve vice chairman, and Mark Zandi, Moody's chief economist, recently concluded, "TARP has been a substantial success, helping to restore stability to the financial system and to end the freefall in housing and auto markets. Its ultimate cost to taxpayers will be a small fraction of the headline $700 billion figure."

In reality, TARP almost certainly prevented a full-fledged credit collapse and economic meltdown in the fall of 2008 -- and with an estimated final price tag of approximately $30 billion (and that number could fall even lower) it seems a rather small price to pay for avoiding economic Armageddon.

Breaking down the individual parts of the TARP program sheds even more light on its success. Repayments from banks, dividends, profits from stock sales and interest will mean that the bank bailout part of the program will likely earn taxpayers a tidy $16 billion profit. Last week the Treasury Department announced a plan for the troubled insurer AIG to pay off the last of its taxpayer debts, with the possibility that the government will earn a profit on that money as well.

What about the Obama administration's auto bailout? Here again, the ending is a happy one. Had America's car companies been allowed to fail, the impact on the already economically moribund Midwest would have been devastating. By some estimates a million jobs might have been lost and countless businesses shuttered. At the height of the economic downturn this would have sent the economy into free-fall.

Nearly two years later and for the first time in six years all three major carmakers are turning a profit. As U.S. Rep. Barney Frank succinctly described: "The single most effective thing that the federal government has done to preserve and set the basis for manufacturing in America was to intervene with General Motors and Chrysler."

Now, of course, any government bailout comes with a cost, particularly the moral hazard of providing a lifeline to companies that have engaged in bad behavior. But according to Blinder and Zandi, without TARP and the federal stimulus passed in February 2009 -- another much-derided government action that has brought serious benefits -- "America's gross domestic product would have fallen more than 7 percent in 2009 and almost 4 percent in 2010, compared with the actual combined decline of about 4 percent."

Yet antipathy toward TARP has created a somewhat bizarre situation: We have a government program that saved millions of jobs, prevented another Great Depression and came in well under budget (even possibly at a profit), and yet both political parties are taking turns attacking it.

What is most ironic about the anti-bailout rhetoric is that it is grounded in the belief that the federal government is too involved in the workings of the free market system, when in reality it was the lack of government involvement in the oversight and regulation of financial markets that brought about our current financial crisis.

If the economic meltdown and the rise and fall of the housing bubble in 2008 demonstrate anything it is that we need more, not less, government oversight of the economy to prevent the sort of excesses that led to the financial crisis and the resulting bailouts. The argument made by some that TARP was unnecessary and that the private sector could have somehow saved the day is sheer folly.