Two cheers for TARP

A polarized Congress is leaving Washington with its most important work undone. The reason, we are told, is because it's an election year.

But two years ago was also an election year with arguably higher political stakes. Nonetheless, a Democratic Congress and a Republican president actually worked in bipartisan fashion to address the most serious financial crisis in modern times.

October of 2008 dawned with international credit at a complete standstill. No one was willing to lend. Good companies couldn't secure regular financing to pay bills. The contraction in international trade was greater than that of the Great Depression. In the last quarter of 2008 our GDP dropped 6 percent, we lost 1.7 million jobs, and our collective household net worth dropped by $5 trillion.

Tomorrow marks two years since President George W. Bush signed into law the Troubled Asset Relief Program (TARP). Much ballyhooed today as poster child for a misguided bailout mentality, we wish to give two cheers for TARP.

Before we do, let's clarify potential misconceptions.

TARP authorized the U.S. Treasury to buy up to $700 billion in assets. It should not be confused with President Barack Obama's $862 billion fiscal stimulus. Both vastly increased government spending. But TARP was for investments in assets whereas the stimulus was for spending on programs. Also, TARP never came close to spending all $700 billion authorized.

The first cheer is for process. What we saw with TARP was serious, albeit rushed, deliberation between the secretary of the Treasury, the chairman of the Federal Reserve, the White House and congressional leadership. Together they creatively addressed a financial crisis of unheard-of dimensions. They accommodated differences of opinion through compromise. Because the situation was evolving so rapidly, they built flexibility and discretion into the legislation. But instead of cutting and running, Washington maturely addressed the most serious economic crisis of the century.

The second cheer is for results. TARP sent a clear message to markets around the world that the U.S. government would protect its financial system. It helped to quickly calm frenzied credit markets. And with this week's announcement that the U.S. Treasury will sell off its investment in AIG, it looks like TARP investments could actually break even as it winds down.

Why no third cheer? Any intervention in the market is fraught with unintended consequences. There is plenty to grumble about with regard to who received TARP investments. TARP never really dealt with the ongoing problem of so-called toxic assets (securitized housing assets that were difficult to price). Nonetheless, even during an election year, our politicians behaved like statesmen and prevented calamity for what, in the end, will be a relatively small bill. Hip hip hooray!