Adumbration

Econtalk host Russ Roberts recently interviewed Neil Barofsky, former Special Inspector General of the TARP (and life long democrat), about his work with the Troubled Asset Relief Program and other related programs.  Barofsky was responsible for making sure that the taxpayer money spent in those programs had some semblance of accountability, and instead was faced with obstacles thrown up not by the banks, but by the US administration and Treasury departments.

TARP and the other programs were sold to the American people on the argument that the financial system was running off the rails and something had to be done.  Whether one believes this story, or that is was the sincere and well-intentioned objective of our dear leaders, like so much else in financial regulation the result was ultimately fraught with the deep moral hazard of many government programs.

He says at 46:04

"all that money got paid out, and you have another windfall for banks, who under a normal functioning free market get punished for that counter-party risk, from putting on such big bets on with AIG, which they had to have known that AIG would never be able to pay off if we had a housing crisis. But again, the whole presumption of bailout so underlies our market, that we don't have a free market, we have a government-subsidized market that encourages inefficiency, and encourages really unfair and unjust results.   When actions are taken, like Geithner with AIG, it just reinforces all of that unfairness and inefficiency in our markets."

At around 54:08: 

"[what if] there were some sort of diversity of voice ... but it wasn't, and that makes it very easy to discount those views, to rule them out as being stupid or politically motivated, which is what Geithner and his team did to any dissenting voices, when you maintain this type of echo chamber.  And the second part of course is, one of the aspects of the revolving door, is that there is ahuge incentive for people within the government to get those jobs on wall street, and shaping what they do.  I was told point blank, by the assistant secretary of the Treasury, that I was harming my own interests in getting one of those shots one day, by my tone, by my harshness of my criticisms of wall street and the government and that I needed to change my tone.  And so there's also still that promise of reward if you do right by wall street.  I think it's interesting that Ron Susskinds book, he quotes the Wall Street CEOs that Tim Geithner, they refer to him as "our man in Washington".  And there's an eventual payoff for that type of role, I imagine."

Barofsky has written a book about his experience as TARP Special Inspector General - Bailout.  It is interesting to hear someone with such exposure to the internal workings of these programs, come out with direct observations of the corruption that has become endemic, but ultimately inherent to the government control of these industries.

The banks should have been allowed to fail from the start.