TARP and Creative Destruction


My post this morning praising TARP for helping to rescue the banking system in 2008 produced the following Twitter conversation:

Will Cain: B/C it may have “worked” doesn’t make it right. TARP broke a central tenant of capitalism: success & failure….It’s a dangerous place to be — defending and judging things on whether or not they worked and not whether they’re principled.

soopertrev: Interning Japanese-Americans during World War II “worked” in a way too.

Will Cain: Exactly.

This is, obviously, a pure libertarian reaction, but it’s misguided on a couple of levels. First, even taken on its own terms, interning Japanese-Americans during World War II only “worked” if you genuinely believe we might have lost the war if we hadn’t done it. Aside from Michelle Malkin, I don’t know anyone who believes that today. Conversely, I do believe that the American (and therefore global) banking system would have been in serious trouble if not for TARP.

Beyond that, though, you simply can’t think about the banking system the way you think about, say, the computer industry or the textile industry. In the latter two, as with most industries, there’s a private sector, where firms start up and fail, and a public sector that sets some rules of the road but — ideally, anyway — doesn’t need (or want) to decide which firms succeed and which ones don’t. The relationship between the two sectors varies from country to country and from era to era, but still, the private sector is basically distinct from the public.

In banking it’s not. As far as I can tell, every large-scale banking system ever created is fundamentally a partnership between the public and private sectors all the way down to its roots. The fact that the government is charged with regulating the currency ensured this even in the past, and on a practical level the worldwide adoption of central banking over the past century has cemented this bond in ways that simply make it nonsensical to try and divide the two. Citigroup may be a private corporation, but for all practical purposes it’s also a branch of the Federal Reserve. Money and credit successfully flow throughout the country (and the world) only because of a symbiosis between the two, and between Citigroup and every other bank in the world.

So, no, you can’t simply let big banks fail. It’s like letting the electric grid fail: the entire economy would grind to a halt if it did, and no responsible government will allow that. TARP “worked,” and I’m happy defending it on those grounds, but I’m also happy defending it on the principle that sovereign governments have a responsibility to prevent their banking systems and their economies from collapsing. Safeguarding money and credit are obligations as fundamental to any modern government as defending against foreign attacks, and that’s what TARP did.

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