TARP and Twitter

I had an interesting web experience. My tweet noting that the US Treasury made a profit on TARP got a relatively large number of replies. Many people were outraged in many contradictory ways.

Twitter is damaging the discussion. Trump on twitter lowered the level of debate. I am now a carrier of Twitteritis into the Angry Bear community, because I am brining a tweet debate here.

The discussion starts with this tweet

tarptwitter

note it is the 5th of a series. Trying to summarize, I realize that I should quote

1. To those saying there is no such thing as a good Trump voter. Context man. Context
2. Imagine a scenario. You got two choices, as understood by you
. This is the key. This is how you see it, not how others think you see it
3. Vote for candidate
A) who will devalue you socially & economically
Or
B) who might devalue economically, but will value you socially
4. What will the majority of any group do? Including blacks & Latinos?
If you don’t give them SOMETHING to vote for they won’t vote for it
5. Mistake is thinking that Trump voters believe they are getting anything economically out of a Clinton administration. (TARP cough TARP)

I will briefly summarize my impresssion of @Chris_arnade thoughts on the topic expressed on twitter.

Overall the point is that it is possible to understand why people voted for Trump. Consider TARP. Anger at TARP (and NAFTA) helped Trump. I agree entirely, and think this is important. Hatred of TARP helped Trump.

I am trying to get to responses to my tweet

“@Chris_arnade TARP was a Bush admin initiative and a gigantic success. US gov made a profit”

They do not include anyone suggesting it is unfair to Consider Clinton responsible for TARP (I agree — she deserves credit only for her yes votes in Senate roll calls). The fact that TARP was a Bush administration initiative is clearly considered irrelevant to the question of whether Democrats should be punished for TARPing.

I’m going to put alll of my thoughts after the jump.

Some of the discussion had something to do with developing good policy.

The fact that TARP reduced the Federal debt is considered irrelevant by many people. It is noted that it is easy to find trades which are usually profitable if one bears a lot of risk. It seems to be assumed somehow that the Federal Government bearing risk is a bad thing — at least for the Federal Government some how. There is no explanation of why this isn’t a good thing. This assumption is made also by sine economists and even by some economists who don’t think that automatic stabilizers are the work of the devil. It makes no sense at all.

It is argued that TARP should be evaluated as one would evaluate say a mutual fund. Return greater than the nonTARp Fed Gov portfolio of being less long on preferred shares of banks and less short Tbills. But the TARP returns are riskier than the nonTARP returns. So I should invest in nonTARP US gove not TARP US gov. This makes no sense at all. It isn’t just an opinion — Congress told the CBO to abandon its normal approach of estimating conditional mean effects on national debt after 10 years and value TARP as risk averse investors would.

This is very much like assessing Thanksgiving by pretending we are Turkeys.

I think this argument is almost universally accepted for three reasons.

The first reason to evaluate TARP like a Turkey is valid but not relevant to this case. The rule that the Federal Government must not invest in risky assets is usually justified because of moral hazard. If someone at the Treasury says he has a risky strategy which reduces the debt in expected value, we can be sure it is risky, but can’t know about expected values or even our agent’s subjective expected value. It could be that the asset is being sold at far above its market value by someone who bribed the Treasury employee. This means that it is necessary to have clear simple rules, because we don’t trust our agents with discretion. It does not mean that the rule must be “never go long on any risky asset”.

The second reason is that the argument that, aside from saving the financial system and preventing a second great depression, TARP was profitable tends to force one to accept extreme policy proposals which are well outside the Overton window. If the Treasury can make money when its goal was to save banks, then it can make huge amounts of money if its goal is to make money. Similarly if the FED obtained the largest profits ever recorded by buying assets (which weren’t being traded — the market had frozen) no one else wanted and paying a price much higher than anyone else would pay, then it could make even more gigantic profits buying risky assets at the market price.

My case for TARP implies I must support (partial) public ownership of the means of production. I must say that for the Federal Government to purchase 10% of all risky assets has a welfare effect similar to a trillion dollar windfall. I do say that (as do John Quiggin, Miles Kimball and many others). I haven’t read any criticisms of this proposal. I think there are two reasons. First the proposal is so far out there that it isn’t on the agenda. Second, no one can think of any argument that the proposed policy doesn’t have benefits trillions of dollars greater than it’s costs.

Here TARP is opposed (also by progressives) on the grounds that the private sector is efficient, so the Federal Government should usually leave the economy alone and, when it intervenes, act like a business. It is very odd that left of center economists generally stick to this assumption when discussing what to do about the 2008 financial crisis.

I will try to focus by noting an argument made by many. TARP made a profit. But ex ante the risk return profile was inefficient and undesireable. This argument is based on the assumption that Federal Government should be exactly as risk averse as private investors (collectively sharing risk). I have never seen any justification for the claim that the Federal government should value its assets at market prices and not the expected value of returns discounted at the Treasury rate. It is just assumed based on nothing at all (exactly zero, 0, niente, nada).

I think it is based on two unquestioned assumptions

1) markets are wonderful
2) markets are worthless

1) is necessary, because the basic idea is that the Federal Government should leave the market alone except for social insurance and addressing unusual market failures.

2) is necessary, because it is just assumed that the value of an asset to the Federal Government must be equal to its value to the counter party from whom it is purchased. It is assumed that whenever people transact, one gains only at the expence of the other. It assumes that markets serve no useful purpose.

Unfortunately most of the discussion was conducted at a level much lower than the argument that markets are wonderful and worthless.

There was some, clearly related, zero sum logic. The argument is that TARP was good for bankers (it was) so it was bad for the rest of us. One guy even argued that Federal Government profits are money sucked out of private sector. So someone supported laissez faire using the argument that profit is theft.

But even this argument comes closer to an evaluation of TARP then most. Several people said that one should include the cost of foreclosures when evaluating TARP, as if TARP caused foreclosures.

The logic seems to be
1) TARP was good for bankers
2) bankers are bad
3) TARP was bad.

I have often had the experience of people acting as if I am pro-banker because I stress the importance of the fact that TARP made a profit. The debate about policy is a debate about which side you are on — with the bankers or against them. It is all us vs them logic.

Many have asserted that a plain fact is irrelevant, because it suggests that something was good both for bankers and for the rest of us. No one notices that my conclusion is that the Treasury is much better at providing banking services than the banks.

Here the semi-socialist implications of my argument are unthinkable — really unthinkable not unacceptable. People just can’t see what I (and John and Miles and many others) are proposing, because it is so far outside the Overton window.

But the weird thing is that my call for partial public ownership of the means of production is perceived to be right wing. Another example, someone once said the proposal for the Social Security Administration to invest in stock sounds like the Bush privatization proposal, but isn’t really the same. Indeed, public ownership of firms is not exactly the same thing as privatization. It is exactly the opposite thing.

Trying to conclude, I attempt to get back to the original point. People were infuriated by the Bush administration’s astonishgly successful TARP (and Fannie/Freddie rescue). They took out this anger on Clinton by electing Trump. Anger at financiers caused them to hand power to a man who is handing much of it to financiers (Steven Mnuchin, and two Mercers). This is terrible and there isn’t much any economist can do about it. I mean if people think that the unemployment rate is higher now than January 2009, then they are not likely to be receptive to arguments about optimal Federal risk bearing and automatic stabilizers. But I think that, collectively, economists who denounced TARP are totally wrong on the substand and helped TRUMP.

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