Public Anger Over Bailouts May Limit Options in Future Crisis

Thursday, 16 Sep 2010 01:55 PM

 

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Public anger over the U.S. Treasury's $700 billion bailout program may hamper the government's ability to respond to a future financial crisis, a government watchdog warned on Thursday.

The Congressional Oversight Panel said in its latest monthly report that the public "stigma" surrounding the Troubled Asset Relief Program has constrained policy choices and may make it politically impossible to take similar rescue actions in the future.

"Popular anger against taxpayer dollars going to the largest banks, especially when the economy continues to struggle, remains high," the panel said in its September report.

"The program's unpopularity may mean that unless it can be convincingly demonstrated that the TARP was effective, the government will not authorize similar policy responses in the future. Thus, the greatest consequence of the TARP may be that the government has lost some of its ability to respond to financial crises in the future."

The report, issued on the second anniversary of the crisis that drove Congress to approve the $700 billion bailout effort, consulted several prominent economists to evaluate TARP's performance. They concluded that TARP provided critical support at a time when the financial system was in "freefall," but created significant moral hazard in the financial system.

"As long as huge banks can count on taxpayer-funded rescues, we should not be surprised if banks take on enormous risks, knowing they can keep the profits if the banks win and shift the losses onto the taxpayers if he banks lose," said Damon Silvers, the panel's deputy chairman, told reporters.

Panel Chairwoman Elizabeth Warren recused herself from approval of the report, Silvers said. Warren is expected to be soon named by President Barack Obama to an advisory role to set up a new consumer financial watchdog agency, Democratic sources have told Reuters.

The panel under the leadership of Warren, a Harvard Law School professor, has been critical of Treasury's handling of the bailout program, arguing that its housing rescue efforts have been ineffective and taxpayers weren't adequately protected in some bailout decisions.

The latest report also concluded that Treasury Secretary Timothy Geithner's decision to extend TARP until Oct. 3 of this year did little other than to keep alive the government's implicit guarantee of the financial system.

A plan to extend more capital to small and community banks on easier terms met with resistance from bank executives and no new funds were added to address foreclosures or aid securitization markets.

Treasury spokesman Mark Paustenbach, responding to the report, said the need for new bailout programs has been largely negated by landmark financial reform legislation, which "have clear mechanisms for shutting down large financial institutions at no cost to the taxpayer."

Harvard University economist Kenneth Rogoff, consulted for the report, said in written remarks that the government's bailout policy must be given credit for "averting the second great depression that might have happened in its absence. It has not, however, succeeded so far in giving a measurably better trajectory for the economy than has been typical after other postwar deep financial crises."

© 2014 Thomson/Reuters. All rights reserved.

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