TARP and Commercial Paper


Dean Baker denounces the “hoary lie” that TARP was needed to prevent the collapse of the commercial paper market, arguing:

Bernanke was deceiving Congress with his discussion of the commercial paper market because he single handedly possessed the ability to support the commercial paper market. In fact, the weekend after Congress voted for the TARP he announced that he would create a special Fed lending facility to directly buy commercial paper from non-financial companies.

If Bernanke had been honest with Congress he could have told them of his plans to create such a facility before they voted on TARP and explained that the commercial paper market could be sustained whether or not they approved the TARP bailout.

This is worth mentioning now because this hoary lie keeps popping up. Let’s be clear, it was important for the Fed/government to take steps to sustain a working financial system. But these steps could have included conditions that made Wall Street pay a huge price and change its mode of operation forever.

The “keeps popping up” link is to my post from this morning on the money-money market run and I don’t really see that Baker and I disagree. To quote myself:

It would be silly to say that the policies adopted in response to this—TARP and the AIG bailout, primarily—were the only possible responses. But absent some kind of (nominally) costly and unpopular bailout we would have had a costly and unpopular sequence in which people’s “safe” money market accounts were wiped out, to say nothing of perfectly solvent firms being suddenly unable to meet payroll.

So I say: We didn’t need to follow the Paulson/Bernanke/Geithner script precisely, but we did have to take some kind of dramatic and unusual action. Baker says that we did have to take some kind of dramatic and unusual action, but we didn’t need to follow the Paulson/Bernanke/Geithner script. I don’t see these as particularly divergent points of view, but it is worth understanding the issue from both perspectives. Back in the winter of 2008-2009 I thought Baker’s point was the most important one, but from the perspective of the fall of 2010 I think the bigger problem is that a growing number of people have persuaded themselves that there was never any kind of real problem here.