PoliGraph: economists disagree with GOP candidate's TARP claim

Posted at 11:31 AM on August 31, 2012 by Catharine Richert (2 Comments)
Filed under: PoliGraph

On Tuesday, DFL Rep. Betty McCollum, Republican Tony Hernandez and Independence Party Steve Carlson debated issues facing Minnesota's 4th Congressional District residents.

While McCollum and Hernandez agreed on a few things, an area of discord involved the 2008 bank bailout called the Troubled Asset Relief Program or TARP, which McCollum voted for and Hernandez said he opposed.

The affects of the bailout have been devastating, Hernandez said during the debate, which was sponsored by MPR News.

"The reason why unemployment is so high right now is because we bailed out the banks," Hernandez said during the debate. "The reason why the debt shot up $6 trillion since then is because we bailed out the banks."

Economists and financial experts disagree with Hernandez's characterization.

The Evidence

Hernandez argues that his underlying point is that the bailout was a boon for failing banks, institutions that should have been allowed to disintegrate.

"My statement attributing TARP and the bank bailouts to a stagnant U.S. economy was not intended to be a matter of fact, but rather my own opinion and judgment," Hernandez wrote in an e-mail. "I stand by my assertion that the U.S. economy would have stronger employment figures and a lower national debt today if Congress had let the insolvent financial institutions fail and for normal bankruptcy procedures to take place. "

Indeed, there's a reasonable argument to be made about whether the bailout was effective. Hernandez pointed to three news articles that underscore how the bank bailout and the auto industry bailout were costly and essentially prolonged a process that could have ended quickly if the government had stayed out of the picture.

For instance, in 2011, Bloomberg News reported that the Federal Reserve loaned the banks an additional $7.7 trillion - that was on top of the money banks received from the bailout.

Mark Calabria, Director of Financial Regulation Studies at the conservative Cato Institute, is among those who questions the bailout, but says it's not the primary reason the U.S. is still in a financial slump.

"I think to argue that the bailout itself is the primary reason for job loss is an exaggeration if not outright inaccurate," Calabria said.

Calabria points out that employment peaked in the 4th quarter of 2007, and then declined steadily for a long time before the bank bailout even came into the picture. Those job losses were the product of the housing bubble, Calabria said, and one of the main reasons the job market hasn't bounced back is because the housing market is still struggling.

Michael Franc, vice president of government studies at the conservative Heritage Foundation agrees with Calabria, and says that while the bailout may have indirectly been one of the reasons for some unemployment, it's not the reason.

"One of the conservative arguments against government bailouts in general is that they artificially alter the natural trajectory of a recovery," Franc said. "They artificially prop up and sustain businesses that never would have lasted and would have gone under and would have been reconstructed in some way to allow them subsequently to come back and grow."

General uncertainty about the new health care bill, about whether the Bush-era tax cuts will be extended and about regulation is preventing employers from hiring, Franc said.
Tara Sinclair, a macroeconomist at George Washington University a lack of demand for goods and services has prevented employment from expanding.

"I haven't seen any evidence that the bailouts themselves caused higher unemployment," she wrote in an e-mail.

As for the nation's debt, it's true that it's increased about $6 trillion since 2008. But that debt is the product of many things, according to the Congressional Budget office, including President Barack Obama's stimulus bill, and a massive decline in revenue associated with the recession.

The Verdict

Reasonable minds can argue whether the bank bailout bolstered the economy, as McCollum contends, or whether it slowed the economic recovery, as Hernandez says.

But the economists we spoke with agree that it's disingenuous to say that the bailout is responsible for unemployment and the debt; it's far more complicated than that.

This claim is misleading.

To read Hernandez's entire response to MPR, see the comments section.

SOURCES

MPR News, Fiscal concerns dominate 4th District State Fair debate, by Catharine Richert, Aug. 28, 2012

The Congressional Budget Office, An Update to the Budget and Economic Outlook: Fiscal Years 2012 to 2022, accessed Aug. 29, 2012

The Congressional Budget Office, Monthly Budget Review, Fiscal Year 2009, Oct. 7, 2009

The Congressional Budget Office, Monthly Budget Review, Fiscal Year 2010, Oct. 7, 2010

Bloomberg News, Secret Fed Loans Gave Banks $13 Billion Undisclosed to Congress, by Bob Ivry, Bradley Keoun and Phil Kuntz, Nov. 27, 2011

Forbes, General Motors Is Headed For Bankruptcy -- Again, by Louis Woodhill, Aug. 15, 2012

E-mail exchange, Tony Hernandez, Republican candidate for Minnesota's 4th Congressional District, Aug. 31, 2012

Interview, Michael Franc, Vice President of Government Studies, the Heritage Foundation, Aug. 29, 2012

Interview, David John, Senior Research Fellow in Retirement Security and Financial Institutions, the Heritage Foundation, Aug. 29, 2012

Interview, Mark Calabria, Director of Financial Regulation Studies, the Cato Institute, Aug. 29, 2012

E-mail exchange, Tara Sinclair, economics professor, George Washington University, Aug. 29, 2012

Comments (2)

Here's Tony Hernandez's entire response:

The original question by an audience member at the Feb. 28th MPR Minnesota State Fair debate asked about a recent U.S. House of Representatives vote on auditing the Federal Reserve Bank. The debate turned to TARP and the 2008 Wall Street Bailouts.

It is impossible to fully realize the effect TARP continues to have on the U.S. economy today because we don’t have access to all the data surrounding the 2008 financial collapse. Until a full audit of the Federal Reserve is conducted, we the citizens will never know the full extent of the loans and capital the central bank made available and extinguished during the 2008 financial crisis. We do know that $7.7 Trillion dollars was secretly loaned out by the Fed thanks to the pursuit of Bloomberg and the Freedom of Information Act

http://www.bloomberg.com/news/2011-11-28/secret-fed-loans-undisclosed-to-congress-gave-banks-13-billion-in-income.html

My statement attributing TARP and the bank bailouts to a stagnant U.S. economy was not intended to be a matter of fact, but rather my own opinion and judgment. I stand by my assertion that the U.S. economy would have stronger employment figures and a lower national debt today if Congress had let the insolvent financial institutions fail and for normal bankruptcy procedures to take place.

“The reason why unemployment is so high right now is because we bailed out the banks. The reason why the debt shot up $6 trillion since then is because we bailed out the banks.”

1. The national debt was $10.2 Trillion in September 2008 and it is now nearly $16 Trillion
2. The unemployment rate was 6.2% in September 2008 and is now 8.2%
3. Many economists predict the U.S. is on verge of another recession

My analogy is that of an old growth forest. Although it goes against our intuition, lightning striking a tree and creating a forest fire is a natural and healthy phase of forest growth. It rids the earth of the dead and decaying wood and enriches the soil for new growth. Even as the ashes are still smoldering, new life and new trees emerge. I do think the U.S. economy would have likely seen a major deflationary period had Congress allowed the bad banks to fail, but it would have been quick, and in my opinion we’d be well on our way to recovery today rather that facing another recession.

Our political leaders told us we needed TARP to save the economy from the abyss. Rep. McCollum stated at the debate if we did not issue TARP, we’d be in a depression today. My argument is that we are worse off today because Congress passed into law an idea, a precedent, called “Too big too fail.” Chasing good money after bad, rewarding greedy corporate behavior with U.S. taxpayer money, trying to spend and borrow into prosperity, etc. these are not wealth building principles. See GM bail out consequences:

http://www.forbes.com/sites/louiswoodhill/2012/08/15/general-motors-is-headed-for-bankruptcy-again/

Finally, a good example to look to for what the U.S. should have done in response the 2008 crisis is Iceland. This country experienced a systemic financial collapse at the same time as the United States. Iceland’s government chose a different route compared to the U.S. Iceland did not bail out its banks with taxpayer money, it allowed banks to go into default, and it re-collateralized. It took two years from the collapse for Iceland to report positive GDP growth; their unemployment rate is at 6.0% and their economy is growing.

Posted by Catharine Richert | August 31, 2012 11:42 AM

And where is McCollum's response?

Posted by Jamie | September 2, 2012 6:46 PM

Services

• Hourly Newscast
• HD Radio
• iPhone App / Mobile
• E-mail newsletters
• RSS feeds
• Podcasts
• Submit your photos
• Videos
• Weather
• Most e-mailed stories