Then a broker-dealer went bankrupt. The process of chaos began to unfold. We had what looked very much like a run. Given that narrative the response was to somehow stem the run. This meant insuring creditors against losses.
Various schemes were proposed. In the end equity injections were settled upon. The terms where not what I would have wanted but I understand the pressure of being in the moment.
After the equity injections our measures of panic began to subside and indeed have not come back despite the fact that housing has not recovered. This lends credibility to those of us who said that housing and bad loans mattered only to the extent that they were possibly creating insolvency and fueling a run.Do we know for sure that this is narrative is correct – no. However, the level of certainty I think Gupta is asking for is virtually never available to us in real time and is hard to ascertain even looking back. My core case is that the narrative holds and continues to hold as we accumulate more data.
I am sympathetic to this view though I take a slightly different tact. I tend to think that the government should have simply squeezed the financial system for everything that it was worth on the grounds that its the responsibility of the Treasury Secretary to act in the best interest of his clients. The taxpayers were his clients. Making more money for you clients is generally preferable to making less thus he should have tried to make more money.
However, it is important to note that TARP as structured was profitable on the bank side. It wasn’t simply that the taxpayer got his or her money back. Their were warrants that that gave the taxpayers a bit of the upside. I just don’t think they were big enough.
I understand the moral outrage and all but my general take is that the Government in this capacity should act to maximize taxpayer profits, not express taxpayer outrage. I realize that this is not a majority view.