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September 22, 2009


We should perhaps give a more studied read to what Romney said before concluding he's changed his position. In February Romney stated that TARP was "necessary to prevent a cascade of bank collapses." Buying up troubled assets and then reselling them when the market for those assets normalized, in order to thaw a credit freeze, is what TARP was designed for. That's very different from using TARP to buy General Motors and Chrysler, a use of TARP that Romney specifically criticized in the same February speech: "TARP should not have been used to bail out GM, Chrysler and the UAW." It's also different from using TARP to bail out banks in ways that don't involve the purchase and eventual resale of troubled assets.

TARP has been misused and abused. Romney was right to point that out in February, and he's right to point that out in September. Romney may wish to make political hay out of his opposition to the misuse of TARP, but there's nothing wrong with that. What's disappointing is that more political figures, reporters, editorialists, pundits and bloggers have failed to object when the Government has spent tens of billions of dollars under TARP in ways never contemplated when that legislation was enacted.

I think it's a mistake to conflate TARP with the stimulus package. TARP was supposed to prevent a worldwide banking breakdown. No such breakdown occurred, so TARP may have worked. OTOH there's no way to know for sure whether TARP was necessary. Also, we don't yet know the long-term impact of the enormous financial obligations assumed under TARP.

The stimulus has clearly failed. That's no surprise, since the bill contained relatively little immediate stimulus. Furthermore, many economists believe that stimulus is not an effective way to try to end a recession.

In practice, stimulus failed, according to the standards set by President Obama. He said the stimulus bill was needed to prevent the unemployment rate from reaching 8%. Since it has actually risen to almost 10%, it's clear that stimulus hasn't worked. Indeed the unemployment rate suggests that it may have made things worse.

Three economists recently made the case more formally that the stimulus didn't work.

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